Biomass Energy: A Real Estate Investment Perspective
by
Chester Ren Jie Foo
Bachelor of Engineering (First Class Honours), Mechanical Engineering, 2010
National University of Singapore
Submitted to the Program in Real Estate Development in Conjunction with the Center for Real
Estate in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real
Estate Development
at the
Massachusetts Institute of Technology
September, 2014
©2014 Chester Ren Jie Foo
All rights reserved
The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic
copies of this thesis document in whole or in part in any medium now known or hereafter created.
Signature of Author_____________________________________________________________
Center for Real Estate
July 30, 2014
Certified by____________________________________________________________________
Albert Saiz
Associate Professor of Urban Economics and Real Estate,
Department of Urban Studies and Planning
Thesis Supervisor
Accepted by___________________________________________________________________
Albert Saiz
Chair, MSRED Committee, Interdepartmental Degree Program
in Real Estate Development
Biomass Energy: A Real Estate Investment Perspective
Chester Ren Jie Foo
Submitted to the Program in Real Estate Development in Conjunction with the Center for Real
Estate on July 30, 2014 in Partial Fulfillment of the Requirements for the Degree of Master of
Science in Real Estate Development
ABSTRACT
A central consideration in real estate is how value is created in real estate development and
investment deals. A biomass power plant is not only an asset which generates revenues, but
from a real estate perspective, it also creates additional value to the owners’ existing
farmlands. Biomass energy assets are similar to traditional real estate and infrastructure in a lot
of ways. On the other hand, biomass energy assets are characterized by the feedstock fuel and
multiple revenue generators such as sale of power, carbon credits and biomass ash.
Furthermore, favorable regulatory policies make biomass energy assets more distinct and
attractive.
The current biomass investment market is a relatively young and evolving market. Southeast
Asia has a huge potential for biomass investment. The market players are mostly dominated by
investors and firms with specialized technical knowledge about renewable energy and/or
traditional power production, and private equity and venture capital firms are not very active in
this market. The lack of technical insight and information transparency are stopping these
financial institutions from entering the market.
Therefore the Biomass Valuation Model (BVM), developed in Excel®, allow the critical technical
and financial components to communicate effectively, which would help to determine the
viability of the biomass investment projects with greater certainty. The BVM would be able to
generate financial outputs from the perspectives of real estate development, financial and
economic conditions, and the biomass power generation technical process. This valuation
model (BVM) would be helpful to investors, considering the amount of time and effort required
in overcoming the technical barrier, hence providing investors the “first-mover” advantage in
tapping into the biomass investment market.
Thesis Supervisor: Albert Saiz
Title: Associate Professor of Urban Economics and Real Estate
2
Acknowledgement
I would like to express my sincere gratitude and appreciation towards my thesis advisor,
Associate Professor Albert Saiz for his invaluable advice and assistance in my research for this
thesis.
Prof. Saiz has given me a lot of guidance and insightful comments during regular meetings
which often help me progress in my research. I would like to recognize his guidance,
encouragement and friendship, which allow me to grow and to discover new challenges.
Moreover, I take this opportunity to acknowledge Prof. Saiz’s supervisory skills, especially the
way he motivates students who are engaged in research for their thesis. I would like to express
my appreciation for his continuous support during the long period that I took to collect, compile
and analyze the extensive documentation and developing the methodologies for this project.
Those careful guidance and insightful comments have reduced the defects of this thesis to the
minimum. From him, I received expert suggestions and unfailing patience, which makes this
thesis possible. Without him, this thesis would not have been successfully completed.
I would like to thank Prof. David Geltner, Prof. Bill Wheaton and Mr. John Kennedy from MIT
Center for Real Estate and Prof. Christopher Noe and Prof. Jean-Noël Barrot from MIT Sloan for
sharing with me their professional knowledge and expertise in real estate and finance through
their courses at MIT, which provides a strong foundation for this project to be built on. In
addition, I would like to express my appreciation to Mr. George Ochs (J.P. Morgan) and Mr. Sam
Davis (MIT CRE). I have benefited a lot from their vast professional experience. I thank them for
their encouragement and recognition.
I would also like to express my sincere gratitude to Ms. Rocelyn Dee (MIT SM’02). She is a great
mentor and I benefited greatly both professionally and in my personal life throughout my time
at MIT. I really appreciate her help and generosity, and our friendship.
Lastly but not least, I would like to thank my wife, Roo for her love and encouragement, and our
families for their support.
3
Table of Contents
List of Figures..............................................................................................................................6
List of Tables ...............................................................................................................................7
Chapter 1 Introduction .............................................................................................................8
1.1
Motivation ....................................................................................................................8
1.2
Research Scope .............................................................................................................9
Chapter 2 Infrastructure and Real Estate: Real Assets ............................................................11
2.1
Introduction to Real Assets .........................................................................................11
2.2
Real Estate: A Brief Introduction .................................................................................12
2.3
Real Estate: Characteristics .........................................................................................12
2.4
Infrastructure: A Brief Introduction .............................................................................15
2.5
Infrastructure: Characteristics .....................................................................................16
2.6
Moving Forward: Biomass Energy ...............................................................................18
Chapter 3 Analysis of the Market Potential ............................................................................19
3.1
Global Infrastructure Market ......................................................................................19
3.2
Renewable Energy Market ..........................................................................................20
3.3
Biomass Energy Market ...............................................................................................24
3.4
Southeast Asia Region (ASEAN) ...................................................................................26
3.5
Biomass Investment Market: Thailand ........................................................................27
Chapter 4 Biomass Energy Investments ..................................................................................31
4.1
Introduction ................................................................................................................31
4.2
Biomass: Characteristics ..............................................................................................31
4.3
Biomass Power Generation Using Combustion Technology .........................................33
4.4
Biomass Power Plant Development Considerations ....................................................34
4.4
Investing in Biomass Power Plant Projects ..................................................................38
4.5
Biomass Investment Decision Process .........................................................................44
Chapter 5 Biomass Valuation Model (BVM) ...........................................................................47
5.1
Introduction ................................................................................................................47
5.2
Methodology ..............................................................................................................47
5.3
Development of Biomass Valuation Model..................................................................49
5.3.1 Technical Considerations for Biomass Power Plant ...........................................49
5.3.2 Financial Considerations for Biomass Power Plant ............................................51
5.3.3 Constructing the BVM.......................................................................................58
5.4
Analyses, Results and Discussions ...............................................................................61
5.5
Why the Use of BVM? .................................................................................................73
5.5
Limitations of BVM......................................................................................................73
5.6
Recommendations for BVM ........................................................................................73
4
Chapter 6 Conclusion ..............................................................................................................74
Bibliography .............................................................................................................................75
Appendix 1: Real Estate vs. Stocks .............................................................................................77
Appendix 2: Energy Crops .........................................................................................................78
Appendix 3: Licensing and Permitting for Biomass Power Plant Projects ...................................79
Appendix 4: Operating Parameters ...........................................................................................81
Appendix 5: Traveling grate .......................................................................................................82
Appendix 6: Steam Turbine .......................................................................................................83
Appendix 7: Cost of Connecting to the Grid, ..............................................................................84
Appendix 8: Cost of Investing in Cyclone ...................................................................................85
Appendix 9: Biomass Plant Configuration ..................................................................................86
Appendix 10: Steam Condition at Various Stages , ......................................................................87
Appendix 11: Flue Gas Condition at Various Stages ...................................................................87
Appendix 12: Feedstock List ......................................................................................................88
Appendix 13: Investment of Equipment ....................................................................................89
Appendix 14: Investment of Equipment ....................................................................................90
Appendix 15: Details of Loan .....................................................................................................91
Appendix 16: Wholesale Electricity Tariff Growth Rates ............................................................93
Appendix 17A: Cash Flow Model (No leverage Model) ..............................................................94
Appendix 17B: Cash Flow Model (Leverage Model, Equity 40%, Debt 60%) ...............................97
Appendix 18A: Levered Cash Flow Distribution (Debt 60%, Equity 40%) ..................................100
Appendix 18B: Unlevered Cash Flow Distribution vs. Levered Cash Flow Distribution (Debt 60%,
Equity 40%) ............................................................................................................................. 101
Appendix 19: IRRs of Cash Flow with Leverage (Debt 60%, Equity 40%) ..................................102
Appendix 20: Variation of IRR with Depreciation Rate (Years of depreciation) ........................ 103
Appendix 21: BVM in Excel®.....................................................................................................104
5
List of Figures
Figure 1: Risk-Return Ranking of Real Assets .............................................................................11
Figure 2: Infrastructure Sector Breakdown ................................................................................16
Figure 3: Asset Composition of Efficient Frontier .......................................................................17
Figure 4: Global Infrastructure Investments Required for 2013-2030, $ trillion .........................19
Figure 5: Forecasted Generation of Various Energy Types Benchmarked to 2010 Levels ...........21
Figure 6: Estimated Share of Global Energy Consumption, 2012................................................25
Figure 7: Breakdown of Global Electricity Production, 2013 ......................................................25
Figure 8: Biomass Feedstock Availability in ASEAN ....................................................................26
Figure 9: Level of Support for Biomass Investment in ASEAN ....................................................27
Figure 10: Characteristics of Biomass Energy Asset ...................................................................32
Figure 11: Biomass Power Generation Process ..........................................................................34
Figure 12: Risk-Return for Greenfield Biomass Projects .............................................................39
Figure 13: Conceptual Representation of a Biomass Power Plant Project Structure ...................40
Figure 14: Project Financing Model ...........................................................................................41
Figure 15: On-Balance-Sheet Financing Model ..........................................................................43
Figure 16: Biomass Power Plant Project Development Overview ...............................................45
Figure 17: Biomass Investment Decision Process .......................................................................46
Figure 18: Approach in Developing the BVM .............................................................................48
Figure 19: Biomass Power Production Model ............................................................................51
Figure 20: Biomass Financial Model...........................................................................................57
Figure 21: Biomass Valuation Model (BVM) Process ..................................................................59
Figure 22: Cost and Revenue of the Biomass Power Plant .........................................................60
Figure 23: Key Parameters for Analysis ......................................................................................61
Figure 24: Cash Flow Distributions (Unlevered and levered) ......................................................62
Figure 25: Effect of Levered Cash Flow ......................................................................................63
Figure 26: NPV of Revenue and Cost .........................................................................................64
Figure 27: IRR of Unlevered Cash Flow ......................................................................................64
Figure 28: Parametric Analysis of Select Parameters .................................................................66
Figure 29: Variation of IRR with Price of Carbon Credits ............................................................67
Figure 30: Variation of IRR with Depreciation Rate (No Leverage) .............................................68
Figure 31: IRR Variation to Feedstock Price Growth Rate (Year 1-25) ........................................69
Figure 32: IRR Variation to Feedstock Price Growth Rate (Year 1-10 only, thereafter stabilizes at
2.5%) .........................................................................................................................................70
Figure 33: IRR Variation to Biomass Ash Price Growth Rate (Year 1-25) .....................................70
Figure 34: IRR Variation to Biomass Ash Price Growth Rate (Year 1-10 only, thereafter stabilizes
at 2.5%) .....................................................................................................................................71
6
List of Tables
Table 1: Declines in Inflation-Adjusted Returns for “Big Bear” event from 1970 – 2011.............14
Table 2: Characteristics of Direct and Indirect Investment .........................................................15
Table 3: Similarities and Differences between Infrastructure and Real Estate ...........................18
Table 4: Drivers of the Renewable Energy Market .....................................................................22
Table 5: Potential of Biomass from Rice ....................................................................................28
Table 6: Thailand's Adder Scheme for Biomass Energy ..............................................................29
Table 7: Power Generation Capacity Assumptions.....................................................................51
Table 8: Power Generated Results .............................................................................................52
Table 9: Investment Costs of Equipment Based a Project 9.8 MW Capacity ...............................53
Table 10: Investment Costs of Preliminary and Construction Phase ...........................................54
Table 11: Power Plant Operating Parameters ............................................................................55
Table 12: Cost of Feedstock Parameters ....................................................................................55
Table 13: Revenue Generators Parameters ...............................................................................55
Table 14: Further Details on Revenue from Biomass Ash ...........................................................56
Table 15: Capital Structure Parameters .....................................................................................56
Table 16: NPV Assumptions .......................................................................................................57
Table 17: Ranking of Parameters ...............................................................................................66
Table 18: IRR for 20 years Straight Line Depreciation ................................................................67
Table 19: IRR for 5 years Straight Line Depreciation ..................................................................68
Table 20: The Optimal Depreciation Rate ..................................................................................68
Table 21: Default IRRs ...............................................................................................................72
Table 22: Without Subsidy of Electricity Sale (i.e. no adder) ......................................................72
Table 23: Without Adder and Tax Incentives .............................................................................72
Table 24: Results of IRR vs. Subsidy and Tax Incentives .............................................................72
7
Chapter 1 Introduction
1.1
Motivation
Infrastructure asset, an emerging asset class presents investment opportunities in both
developed (US and Europe – Replacement of existing infrastructures) and developing (Asia and
Africa – New-Built infrastructures) nations. As investors begin to search out and invest
strategically in alternative assets that can deliver returns which bonds and equities could not,
real asset class is gaining acceptance as an essential asset in portfolio construction alongside
equities and fixed income (Azelby & Hudgins 2007).
Infrastructure is the foundation of any growing economy. Infrastructure assets provide essential
services to society, such as the movement and storage of goods, people, data or resources. In
many instances, these assets operate on a monopolistic basis. Experts estimate that Asia’s
economies will require about $750 billion per year to be spent on infrastructure (Bhattacharyay
2010; Tahilyani, Tamhane & Tan 2011). Therefore, the importance of investment in
infrastructure is evident. In addition, the trend in which governments have given up their
monopoly or investments in infrastructure projects has made infrastructure an investable asset
for investors. To capitalize on the huge need for infrastructure in the region, the investment
focus is on investing primarily in growth opportunities and providing expansion capital.
An important component of infrastructure is energy, which is a key item on everyone’s agenda.
The dependence on fossil fuel as well as its cost would influence both the stability and growth
of any economies. Political turmoil in the Middle East and between Russia and Ukraine has sent
across a very strong message on the importance of reducing the energy dependence on other
countries.
To reduce the reliance on countries for energy, renewable energy has become an important
component for diversification of the overall energy needs, and it is now a mandate in any
country’s energy portfolio. Key factors for driving the adoption of renewable energy includes
national and international policies, energy prices, technologies available and capital market.
There are several forms of renewable energy such as solar, wind, biomass power and they
share a common characteristic which is they would need certain a medium – operating assets
such as solar panels, windmills and power plant to generate electricity. Therefore investments
in these assets are expected. The scope of this thesis focuses on the real estate that produces
the renewable energy.
8
In a typical real estate, an important consideration is its rental value where the rent forms the
bulk of the property’s income. For a biomass power plant, the rental value instead consists of
electricity and heat sales, carbon credits and sales of fertilizers. Another important
consideration is the costs. They are typical real estate costs like development, financing and
operation & maintenance costs and depreciation. Pro renewable energy legislations are also an
important factor toward a good investment in biomass power plant.
Investments in renewable energy power generation are broadly gathering interest and could
ultimately form part of an investor’s asset allocation. Biomass in particular can be of interest to
real estate investors due to its small size i.e. relative lower investment cost and private
ownership i.e. more control over asset. However, one limiting factor on investment in biomass
energy is that investors have limited experience and lack of technical expertise, due to fact that
the biomass energy market is still developing but fast growing. Hence, the key focus of this
thesis is to introduce a mechanism to analyze biomass energy investments that could provide
in-depth insight and analysis towards investment decisions.
1.2
Research Scope
The renewable energy market very broad and operates differently in different regions. The
scope of this thesis would focus on a targeted geographical region i.e. Southeast Asia (also
known as ASEAN1) in order to achieve a thorough and in-depth analysis. Thereafter, this
research will focus on biomass power plants and how real estate investors should approach the
fast-growing market of biomass power plants in Southeast Asia and how these assets could be a
real estate as an investment opportunity and be added as part of the investors’ portfolios.
ASEAN has rich resources of biomass fuel and provide a vast potential for biomass energy
investors. A review of these markets can be used as a guide for other biomass investment
projects. The thesis will attempt to address the central question: “How to make a
determination of good biomass investments”.
The thesis structure would be as follows. Chapter 2 will explore the definitions and uses of real
estate and infrastructure as investments, and how biomass energy investment can be included
in investors’ portfolios. In Chapter 3, the thesis will address the renewable energy market
broadly and focusing on the ASEAN region and biomass energy market with an aim to better
understand the market dynamics and opportunities.
1
The Association of Southeast Asian Nations (ASEAN) is a political and economic organisation of ten countries
located in Southeast Asia, which was formed on 8 August 1967. The 10 members include Brunei Darussalam,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
9
In Chapter 4, the thesis would delve in to review biomass energy asset characteristics,
understand biomass energy assets in-depth, and develop the Biomass Investment Decision
Process provide some guidelines of the process of biomass investment for investors who are
interested in entering the biomass investment market. The thesis would then develop a
Biomass Valuation Model (BVM) to analyze the project feasibility in Chapter 5. The BVM would
help to analyze the assets’ performance over its life cycle vis-à-vis its operating parameters i.e.
the technical and financial aspects. The technical aspect is often ignored by financial institution
investors. Coupled with the lack of technical expertise, financial institution investors are not
well equipped to enter the biomass investment market readily. The thesis would focus on
ASEAN – Thailand, an early mover in biomass investment.
10
Chapter 2 Infrastructure and Real Estate: Real Assets
2.1
Introduction to Real Assets
Real asset is an asset class that is gradually gaining acceptance as an important component of
the investors’ portfolio. It is the third asset class alongside with traditional asset like equities
and fixed income (Azelby & Hudgins 2007). Real assets consist of physical asset investments in
real estate, infrastructure, timberland, farmland, etc. that provide investors the ability to
perform while operating in market uncertainties. These assets could provide a stable source of
income in weak markets and capital appreciation in strong markets.
Real assets’ typical performance bridges the gap between fixed income and equity (see Figure
1). First, they generate yields that are competitive with other fixed income alternatives. Their
stable bond-like payment structure can serve as a reliable base for stable mid- to long-term
total returns by contributing to price appreciation in up markets and offsetting losses when
values decline. Second, as a higher yielding, non-bond complement to fixed income, real assets
also offer the potential for equity-like upside and the ability to respond positively to healthy,
growth-induced inflation. While bonds pay out a regular fixed coupon until they reach maturity,
real asset payouts can grow in line with cash flow growth. Real asset investments also provide
better geographic diversification with its localized operating environment, and, perhaps most
importantly, in most cases, with competitive returns.
Figure 1: Risk-Return Ranking of Real Assets
(Source: AMP Capital)
11
This chapter will explore the definitions and uses of real asset as an investment. Within the real
asset group, the real estate sector has become a substantial part of asset allocation for
investors. Subsequently, the market for real estate investments has become more transparent
and efficient with the introduction of REITs 2, listed funds and indices. Real assets have become
more diversified beyond real estate, and investment portfolios are gradually moving towards
including infrastructure asset, a different asset class from real estate (Finkenzeller, Dechant &
Schäfers 2010).
2.2
Real Estate: A Brief Introduction
Real Estate is defined as “Land plus anything permanently fixed to it, including buildings, sheds
and other items attached to the structure.” 3 In addition, real estate is directly affected by the
condition of the environment where the property operated in i.e. “location, location, location”.
Delving deeper into real estate, it is an essential component of the global economy. It is an
asset class that comprises commercial, residential, retail, industrial, etc. It is one of the four
major traditional asset classes for investment portfolio planning, which includes, (1) Cash (TBills), (2) Stocks, (3) Bonds and (4) Real Estate. Each of this asset class possess a unique
combination of the five dimensions of investment performance (Geltner et al. 2013) which
includes, (1) Risk, (2) Return on Investment, (3) Current Yield, (4) Growth and (5) Inflation
Protection.
2.3
Real Estate: Characteristics
Real estate is asset class is a hybrid of income and capital growth. Real estate has a component
similar to a coupon bond, which pays a regular, stable income stream, and it also has a
component similar to a stock, which its property value tends to fluctuate when influenced by its
operating environment. Some of the other characteristics (Geltner et al. 2013) that make real
estate unique are as follows:


2
3
Tangible Asset – Real estate asset are physical assets, hence this corresponded to the
importance of location.
Information Inefficiency – Real estate deals are usually executed in the private market.
Hence information is not efficiently disseminated among market participants. This
increases the difficulty in determining the value of assets in comparison to stocks and
bonds. On the other hand, this also creates information asymmetry among market
Real Estate Investment Trust
Investopedia, (http://www.investopedia.com/terms/r/realestate.asp)
12
participants, which allows investors with access to this special information, expertise or
resources to achieve greater returns.

Illiquidity – The sellers and buyers would have to source for their deals, usually through
brokers. There is usually a significant time lag 4 between the decision of a property’s sale
and when the transaction is completed. An exception would be listed real estate
securities that are traded on public exchange.

Management of Property – Because real estate is tangible, it needs to be managed in a
hands-on manner. Tenant complaints must be addressed. Landscaping must be handled.
And, when the building starts to age, it needs to be renovated.

High Transaction Costs – Real estate transaction in the private market has high costs.
There are broker’s commissions, legal fees, design fees and many other costs that would
raise the investment cost above the purchase price. The high transaction costs resulted
in investors taking a long term horizon when accessing the risk and return of the
property
No fixed maturity – Compared to a bond investment which has a fixed maturity date,
real estate investment does not normally mature. Therefore real estate investors have a
rather long term horizon on the risk and return of the property. An exception would be
real estate debt investment which has a fixed-term.

Why do investors invest in real estate? Firstly, from a portfolio theory perspective, real estate
provides diversification benefits as it possess a unique risk-return combination and low
correlation with the traditional asset classes5, which help to push the efficient frontier inwards
resulting in lower risk for a given return i.e. yield enhancement. Geltner has observed that, by
looking at the four asset classes’ cumulative total returns net of inflation for their past 41 years
history from December 1969 to December 2011 (see Table 1 and Appendix 1), (a) the
magnitude of the real estate average “big bear 6” was 2/3 of change in magnitude of stocks, (b)
the change in the magnitude of real estate is more regular i.e. predictable and, (c) the
frequency of real estate is lower which half of the frequency of stocks (Geltner 2014).
4
The process could take up to a few months.
The 4 main asset classes are Cash, Stocks, Bonds and Real Estate.
6
Denote by a decline of more than 20% of the asset’s value.
5
13
Table 1: Declines in Inflation-Adjusted Returns for “Big Bear” event from 1970 – 2011
Stocks
Real Estate
Average Drop
-38.1%
-25.7%
Standard Deviation of the Drop
14.4%
9.3%
Range of the years between the Drops
3 to 7
12 to 15
Remarks
2/3 of stocks
More regular than stocks
1/2 of stocks
(Source: Dr. Geltner, RE & "Fat Tails" Risk, 15.427: Real Estate Capital Markets, MIT, Spring 2014)
Secondly, real estate is able to hedge inflation better than bonds. The returns from real estate
investments are directly linked to the rents received from the tenants. Some tenant lease
agreements contain certain lease provisions that indexed the increase in rents to inflation, or
sometime a step-up lease agreement is used, which stipulates the rent increment by
predetermined amounts at various points in the future. In other cases, the rents are increased
when a lease term expires and the tenant renewed the lease. The income from real estate
would trend to increase faster in an inflationary environment. Therefore, this would allow
investors to maintain the real returns.
Investors can invest in real estate via direct investments and indirect investments. Direct real
estate investment refers to buying real estate directly with no active real estate market. The
real estate owners have control over management decisions and are considered active
investors. Indirect real estate investment refers to owning the investment through the public
markets and securitized market. The investors are passive and do not have any direct day to
day control over the operation of the properties. Therefore indirect real estate investing
involves investing in the skills and expertise of other people, such as property or fund managers
by investing in REITs, Unit Trusts, Property Funds, Limited Partnerships and Real Estate
Operating Companies. The two types of investment channels are have their own set of
characteristics (Geltner et al. 2013) as shown in Table 2 below:
14
Table 2: Characteristics of Direct and Indirect Investment
Direct Real Estate Investment
Indirect Real Estate Investment
• Illiquidity
• High liquidity
• Large amount capital required to invest
• Low amount of capital required to invest
• High transaction and management costs
• Low management fees and transaction
costs
• Control of the property, rental income
and capital gains generated
• No control over underlying property
• Risk is concentrated by putting a very
large investment into an individual
property
• Risk is diversified across regions and
sectors.
• Low correlation with stocks and bonds
which helps in portfolio diversification.
• Publicly traded shares tend to exhibit a
higher correlation with stocks and bonds
than direct real estate, which diminishes
the diversification advantages of
investing in real estate.
(Source: Author)
2.4
Infrastructure: A Brief Introduction
In this and the next section, the thesis will introduce the infrastructure asset class and review
its characteristics. Conceptually, infrastructure relates to large scale public systems, services
and facilities that are necessary for daily life and economic activity. It can be further broken
down by the market types, risk-return spectrum, or most directly, the industry sectors. Most
commonly, infrastructure is divided into four categories: energy, transportation, social, and
telecommunications.
Firstly, energy includes oil and gas, coal nuclear and renewable energy (wind, solar, biomass
etc.) power generation and power transmission systems. Secondly, transportation assets,
includes toll roads, bridges, tunnels, railroads, rapid transit links, seaports, and airports. Thirdly,
communications assets, includes radio and television broadcast towers, wireless
communications towers, cable systems, and satellite networks. Lastly, social infrastructure
assets, includes water system, healthcare facilities, and waste management (see Figure 2 for a
graphical representation of the different categories).
15
Figure 2: Infrastructure Sector Breakdown
Infrastructure
Energy
Oil and Gas
Coal
Transportation
Nuclear Power
Telecommunication
Social
Renewable Energy
Biomass Energy
Power Plants
*Scope of this thesis
(Source: Author)
The trend in which governments have given up control in some infrastructure assets has made
infrastructure an investable asset for investors. Broadly, infrastructure assets are usually large
physical properties such as bridges, toll roads and rail, and they are very capital intensive to
invest in. To understand the distinctions of infrastructure with real estate, its general
characteristics will first be presented in the next section.
2.5
Infrastructure: Characteristics
Like real estate, infrastructure is not homogenous. It spans the risk-return spectrum from lower
risk public-private-partnerships in developed countries to higher risk private equity-like assets.
Infrastructure assets have a differentiated set of characteristics (Markard 2010) compared to
other asset classes as follows,

Provision of essential services

Low volatility and inflation hedge – Infrastructure assets tend to have contracted
revenue and/or predictable consumer demand, and hence cash flows are generally
stable, which makes volatility low. In most cases, for example like power utility has
inflation-linked contracts and pricing that protects investors from the effects of inflation
on long-term cash flows.
16

High barrier to entry – Regulation and legislation as well as the capital intensive nature
i.e. high upfront cost create significant barrier to entry for other investors.

Long term investment – Infrastructure is long duration asset, often with a life of 15 to
30+ years. Infrastructure contracts are in most cases long term. For example, Toll road
concessions can last up to perpetuity and the capital intensiveness adds to a long term
character of investments.

Low correlation with other assets – This provides diversification benefits for the
investor’s portfolio.
Generally, infrastructure assets have defensive characteristics, such as high barriers to entry,
relatively inelastic demand and stable cash flows that can support higher levels of debt service
across economic cycles. However, the thesis would note that given that fact that infrastructure
assets possess characteristics such as no flexibility for other uses, large capital investments,
directly affected by changes in policies and regulations, it presents a possible significant level of
risk, which corresponded to higher expected returns. Li’s research (see Figure 3) has shown that
infrastructure assets are high risk-return assets.
Figure 3: Asset Composition of Efficient Frontier
Real Estate
Infrastructure
Commodities
Bonds
Stocks
(Source: Xiangyu Li, Beyond Real Estate: Examining Global Real Asset Allocation Frameworks for
Institutional Investors, MIT Master Thesis, 2012)
17
The thesis will briefly discuss about the similarities and differences of infrastructure and real
estate7. These characteristics have been tabulated in Table 3.
Table 3: Similarities and Differences between Infrastructure and Real Estate
•
•
•
•
•
•
Similarities with Real Estate
Illiquidity
Cash yield is significant part of return
Absolute return objective focus
Importance of location
Inflation hedge
Long term investment horizon
•
•
•
•
•
Differences with Real Estate
Barriers to entry
Less exposure to economic cycles
Longer cash flow predictability, hence
higher gearing is possible
Normally larger individual asset size
No flexibility for other uses
(Source: Author)
2.6
Moving Forward: Biomass Energy
The focus of this thesis would be on biomass energy power plants. Although the biomass
energy asset class is grouped under infrastructure, it has its own set of unique characteristics
that constitute a combination of infrastructure and real estate assets.
Referring to the definition of real estate8 in section 2.2, biomass power plants share the same
characteristics. A biomass power plant requires land and a permanent structure i.e. the plant
for power generation. In addition, it is too, directly affected by the condition of the
environment where it operated in i.e. availability of the biomass feedstock and the demand for
its product – power. A central consideration in real estate is how value is created in real estate
development and investment deals. A biomass power plant can add value to existing plots of
land by converting a traditional cost e.g. agriculture waste into an additional revenue stream
(The Biofore Company 2010; Biomass Thermal Energy Council n.d.).
Moving forward, we will look at the biomass industry in depth. The global infrastructure is a still
a relatively immature9, and the biomass energy sector is especially the case. ASEAN would be a
potential market for biomass investment and the geographical focus of this thesis. The market
analysis will be covered in chapter 3.
7
UBS Global Asset Management, 2014
“Land plus anything permanently fixed to it, including buildings, sheds and other items attached to the structure.”
9
CNBC News, Norway's $890 bln oil fund cuts bond stakes in long-term bet, Jun 26, 2014,
8
(http://www.cnbc.com/id/101792530)
18
Chapter 3 Analysis of the Market Potential
3.1
Global Infrastructure Market
Infrastructure investments for the past 18 years from 1994 to 2012 totaled $36 trillion and it
will cost $57 trillion (see Figure 4 for infrastructure investments required by type) to build and
maintain the global infrastructure till 2030 to maintain the project economic growth 10. Energy
(Power) investment attribute to near a quarter (21.4%) of the total investment required. Global
spending on basic infrastructure such as transportation, power, water and communications
currently stands at $2.7 trillion a year instead of the required $3.7 trillion a year 11. This gap is
expected to widen.
Figure 4: Global Infrastructure Investments Required for 2013-2030, $ trillion
*21.4% of the total
investment required
(Source: McKinsey Global Institute, 2013)
A significant proportion of the governments globally are unable to make up the entire shortfall
in infrastructure investment, although notably, China can pay outright for the development
projects that need to be built. Therefore to make up for this shortfall, private capital could have
a larger role to play as public financing could only make up for part of the solution. Private
capital could come from financial institutions such as banks, pension funds, sovereign-wealth
funds, insurance companies and other institutional investors.
However in today’s context, as the Basel 3 capital rules 12 make such lending less attractive, the
big global banks which used to provide loans to finance infrastructure projects are less willing
10
Mckinsey Infrastructure Practice, Mckinsey Global Institute, 2013
The Economist, The Trillion-Dollar Gap, March 2014
12
Basel III is primarily related to the risks of the bank by requiring differing levels of reserves for different forms of
bank deposits and other borrowings. (http://www.federalreserve.gov/bankinforeg/basel/USImplementation.htm#baseIII)
11
19
to do so. These banks have become very cautious and conservative about making long-term
loans 13 and they are less willing to take lesser risk than it used to be. In the same way that the
development and construction of residential real estate slows when banks reduced the supply
of cheap mortgages, infrastructure development will fall behind its required level when its
financing gets tighter, for example there would be higher equity contribution requirement.
Potential sources of capital could however be found in institutional investors such as pension
funds, sovereign-wealth funds and insurance companies where they managed a total capital of
$50 trillion globally. Infrastructure investment consists only 0.8% 14 of their portfolio. A study on
U.S. institutions that consist of endowments & foundations, public pension, corporate pension
and Taft-Hartley i.e. unions have suggested that the real estate allocations to their portfolio is
about 10% (Geltner et al. 2013). Therefore, this thesis views that an allocation somewhere
around the range of 10% of their portfolio in infrastructure would be ideal.
In Asia alone, experts estimate that the Asian’s economies will require about of $750 billion per
year on investing in infrastructure (Bhattacharyay 2010; Tahilyani et al. 2011). Trends where
investors are beginning to gravitate to infrastructure assets are observed. The assets include
infrastructure, transport and natural resources, where these assets to provide higher income
than bonds and superior risk adjusted returns to equities (Azelby & Hudgins 2007).
3.2
Renewable Energy Market
The renewable energy sector is a growing subset of the infrastructure asset class. In today’s
environment of persistent high oil prices and the growing concerns over energy security which
is closely linked to a nation’s political and economic stability, most governments have directed
policies to encourage the investment and adoption of renewable energy. In addition, increased
concerns of the climate change and global warming, coupled with the recurrence of oil price
increases, renewable energy has thus further strengthening its position as a meaningful
provider of global energy supply.
Hence, this has attracted investors’ interest in the recent years. There is an increasing number
of private investors i.e. private equity15 and venture capital16 investment companies focusing on
13
A typical infrastructure loan term can be about 25 years.
The Economist, A long and winding road, March 2014
15
Live Mint, PE firms’ interest in renewable energy sector remains high, May 13, 2014
14
(http://www.livemint.com/Industry/zE0tkCGsJCQX8Vggf3Q8aL/PE-firms-interest-in-renewable-energy-sector-remainshigh.html?utm_source=copy)
16
RenwableEnergyWorld.com, VC Funding in Renewable Energy: Tracking the New Normal, Apr 16, 2013
(http://www.renewableenergyworld.com/rea/news/article/2013/04/vc-funding-in-renewable-energy-tracking-the-new-normal)
20
the renewable energy sector, and a growing base of institutional investors17 have set aside
allocations in such companies as part of their alternative asset strategies.
Renewable energy18 currently represents about 22% of global electricity generating capacity,
producing more than 4 trillion Kilowatt-hour (kWh) per annum globally 19. The renewable
energy industry’s existing capacity currently stands more than 1500 gigawatts (GW) and about
100 GW would be added annually. This translates to more than $200 billion of investment
annually (REN21 2013). As a result, industry projections indicate that renewable energy will be
the fastest growing source of electricity generation over the next 30 years 20 (see Figure 5).
Figure 5: Forecasted Generation of Various Energy Types Benchmarked to 2010 Levels
Expected growth in
renewable energy
CAGR: 2.82%
Forecasted Power Capacity Generation
230%
210%
190%
Oil
170%
Coal
150%
Natural gas
130%
Nuclear
110%
Renewables
90%
70%
50%
2010 2015 2020 2025 2030 2035 2040
Year
(Source: Author; Data from U.S. Energy Information Administration International Energy
Outlook 2013)
The noteworthy forecasted growth for the renewable energy is expected to be driven by the
key drivers ensuring the sustainability of the global economy and environment. The several key
market drivers and trends (Gan & Smith 2011) leading to the increasing demand for renewable
energy are identified as follows (see Table 4):
17
United Nations Environment Program, Renewable Energy Market Share Climbs Despite 2013 Dip in Investments,
Apr 7, 2014 (http://www.unep.org/NEWSCENTRE/Default.aspx?DocumentID=2787&ArticleID=10824&l=en)
18
Includes mainly biomass, biofuel, hydropower, solar, wind and geothermal
19
U.S. Energy Information Administration, International Energy Outlook 2013
20
U.S. Energy Information Administration, International Energy Outlook 2013
21
Table 4: Drivers of the Renewable Energy Market





Identified Key Drivers for Renewable Energy
Cost of traditional energy
 Economic growth (GDP)
Viable returns
 Energy security
Cost of Capital
 Declining competition from coal and
nuclear generation
Favorable national policies and
 Improving cost competitiveness of new
incentives
technologies
Favorable international policies and
 Increasing global awareness of climate
incentives (e.g. UNFCC’s Clean
Development Mechanism and Subsidies
change
and financing from World Bank and
Asian Development Bank )
(Source: Author)
The thesis would explain select key drivers below:
 Increasing global awareness of climate change – In recent years, increasing concern over
global warming has become a significant catalyst for environmental policy action around
the world, including new legislation mandating renewable energy investment targets
and implementation of feed-in-tariffs that offer cost-based compensation or other cases,
including an adder21 to renewable energy producers.
 Declining competition from coal and nuclear generation – Following the recent
Fukushima nuclear disaster in Japan, public concern over the safety of nuclear power
generation has caused other nations to legislate the early retirement of existing nuclear
capacity, as well as to delayed or halted new nuclear power plant development activities.
Additionally, coal plants are also facing increasing political pressures to comply with
environmental compliance and this resulted in the increasing retirement of coal
generation facilities.
 Favorable national policies and incentives – at least 67 countries, including all 27
European Union (EU) member nations have national targets for renewable energy
supply. ASEAN, China, the EU, U.S., have made a target of 20% renewable energy by
2020. In addition, incentives to encourage renewable energy could include, tax rebate,
subsidy, subsided financing, long term contracts to secure future cash flow, easy of
doing business, etc.
21
Adder is an incremental increase in the price paid per kWh of generation benchmarked to the feed-in grid rate
22
 Improving cost competitiveness of new technologies – Technological innovation over
the last decade continues to reduce the cost of investing and operating renewable
energy generation technologies such as wind, solar and bio-energy. The development in
technology helps to enhance the competitiveness of renewable resources. The
increasing cost competitiveness would provide an attractive means to meet increasingly
stringent environmental standards.
 UNFCC’s Clean Development Mechanism – There is a possibility of obtaining the carbon
credits through the United Nations Framework Convention on Climate Change (UNFCC)
through the Clean Development Mechanism (CDM).
The Kyoto Protocol to the United Nations Framework Convention on Climate Change
(UNFCCC) entered into force on February 16, 2005. Under the Protocol, countries have
committed in greenhouse gas (GHG) emission reduction to moderate global warming by
pledging certain quotas for GHG emission22. The first commitment started in 2008 and
end in 2012. The second commitment started in 2013 and will end in 2020. The
developed parties to the Protocol may use the flexibility mechanisms (the Kyoto
Mechanisms) through international cooperation, including the Clean Development
Mechanism (CDM) and the Joint Implementation (JI), to achieve their targets of GHG
emission reductions23.
The CDM allows emission-reduction projects in developing countries to earn certified
emission reduction (CER) credits, each equivalent to one ton of CO2. The Certified
Emission Reductions (CERs) are climate credits or better known as carbon credits which
are issued by the Clean Development Mechanism (CDM) Executive Board. These CERs or
also known as “carbon credits” can be traded and sold, and used by industrialized
countries to a meet part of their emission reduction targets under the Kyoto Protocol24.
CERs are widely used carbon trading instruments worldwide and are traded between
developed and emerging countries. The price of CERs, which had been traded for as
much as $20 a ton25 before the global financial crisis in 2008-2009 to less than $1 a ton
currently. The market for trading CERs currently stands at 703 million ton, a market
22
For the list of countries and their pledges for the reduction of greenhouse gas emissions please see:
http://unfccc.int/kyoto_protocol/doha_amendment/items/7362.php
23
United Nations Framework Convention on Climate Change, Kyoto Protocol
United Nations Framework Convention on Climate Change, Clean Development Mechanism
25
The Guardian, Global carbon trading system has 'essentially collapsed', Sep 10, 2012
24
(http://www.theguardian.com/environment/2012/sep/10/global-carbon-trading-system)
23
capitalization value of $324 million 26. Gan and Smith’s analysis on the drivers on
renewable energy market has indicated that the drive for sustainable environment is
greatly motivated by the nation’s GDP growth (Gan & Smith 2011). Therefore it is
expected the CER price to return to pre-crisis levels as the global economic environment
pick up its momentum.
Sale of CERs represents possible source revenue from Biomass investments. From a real
estate point of view, it can be seen as an additional (revenue related) rent. The trading
levels of CERs would affect the assets’ performance, value and thus attractiveness.
Focusing on the emerging markets such as the ASEAN region, the growth in energy demand,
concern about climate change and increasing cost of traditional sources of energy will force
emerging markets to give political commitment to develop of renewable energy generation
capacity. In addition, from an investor point of view, with the right combination of country’s
policies, technology and the specific asset class, investments in the renewable energy sector
could generate significant returns. Investors’ ability to identify the most appealing geographical
target, sector and type of investment, in bid to yield attractive returns, would help to catalyze
growth in the renewable energy market.
3.3
Biomass Energy Market
In this section, thesis will analyze the market potential of the biomass energy. The distributions
of energy consumed and the electricity generated. Firstly, as shown in Figure 6 below, we can
see that biomass energy constituted to more than half of the renewable energy consumed
(boxed in red). The thesis would like to point out that the main bulk of the biomass is still
consumed through traditional 27 method, and this would also represent a huge untapped
potential for harnessing the supply of traditional biomass using modern technologies which
energy could be derived efficiently.
26
Business Spectator, Global carbon market to reach record volumes by 2016, Feb 2014
(http://www.businessspectator.com.au/news/2014/2/28/carbon-markets/global-carbon-market-reach-record-volumes-2016)
27
Combusting biomass in an inefficiently and creating pollution. This includes using open fires, stoves, or furnaces
to provide heat energy for small-scale agricultural, industrial processing, and cooking. It is typically found in rural
areas of developing countries.
24
Figure 6: Estimated Share of Global Energy Consumption, 2012
(Source: Renewables 2014 Global Status Report, REN21, 2014)
Figure 7: Breakdown of Global Electricity Production, 2013
(Source: Renewables 2014 Global Status Report, REN21, 2014)
Secondly, in terms of production of electricity, biomass energy is the third largest source of
renewable energy used (see Figure 7). There is a wide range of biomass resources potentially
available for conversion. This includes biodegradable fraction of products, waste and residues
from agriculture (including vegetable and animal substances), forestry and related industries, as
well as the biodegradable fraction of industrial and municipal waste. Therefore, we can see that
the adoption of biomass energy is picking up speed in terms of the world’s dependence on it for
25
power generation. With adequate investments and the right international and national policy,
they would help to catalyze the wave of biomass energy investment.
3.4
Southeast Asia Region (ASEAN)
Biomass is a relatively young industry in Southeast Asia or ASEAN 28. New opportunities and
investments in biomass are emerging in Asia and particularly in ASEAN. Klimowicz’s report has
revealed that shared that ASEAN produces nearly 230 million tons of feedstock annually
(Klimowicz 2013). Considering this potential supply of feedstock for biomass energy shown in
Figure 8, ASEAN is quickly developing itself as an attractive market for developing biomass as an
energy source.
Figure 8: Biomass Feedstock Availability in ASEAN
(Source: Author29)
Governments in ASEAN have pushed for industry-friendly policies to encourage biomass energy
growth, such as the feed-in tariff policy, which serves to simulate investment in renewable
energy technologies. The feed-in tariff policy offers long-term contracts to renewable energy
28
29
Association of Southeast Asian Nations
Reference from COGEN3 (http://www.cogen3.net/doc/articles/ImplementingBiomassCogenASEAN.pdf)
26
producers based on the cost of generation of each technology. In addition, governments have
also provided project developers with investment incentives, guaranteed minimum prices,
power purchase agreements with the utility grid, exemptions pertaining to the import of
equipment and certain tax credits (Ölz & Beerepoot 2010).
Thailand, for instance, was an early mover in identifying the industry’s underlying opportunities
and had formulated policies to encourage biomass projects through the Small Power Producers
(SPP) and Very Small Power Producers (VSPP) 30 scheme introduced in the early 2000s
(Juntarawijit & Juntarawijit 2012). Plenty of the biomass power producers in Thailand are
mostly in the VSPP scheme, given the small to medium scale of biomass investments. The
country has set an ambitious target to achieve 3.7 gigawatts (GW) of biomass capacity by 2022.
Meanwhile in Indonesia and Malaysia, power companies from other countries have been
entering the local biomass power market31.
3.5
Biomass Investment Market: Thailand
Analyses by both public and private organizations, for example, International Energy Agency
(Ölz & Beerepoot 2010) and clean energy professional service providers 32 have shown that
Thailand is the most favorable country for biomass investment (see Figure 9) with the highest
level of government support, financial support and local know-how support in ASEAN.
Figure 9: Level of Support for Biomass Investment in ASEAN
Level of Support
Government
Renewable Energy
Targets
Financial Incentives
Local Know-How
Thailand
Indonesia
Malaysia
Philippines
Vietnam
High
Medium
Medium
Medium
Medium
High
Medium
Low
Medium
Medium
High
Low
Medium
Medium
Low
(Source: Author & International Energy Agency)
Therefore, the thesis would focus on Thailand as the geographical focus and residual products
of rice (rice husk and rice straw) as the feedstock. Rice husk (Ngaemngam & Tezuka 2006) is
30
31
Refer to section 3.5 for more details.
AsianPower, What you need to know about the biomass energy market in South East Asia, 2011
(http://asian-power.com/environment/news/what-you-need-know-about-biomass-energy-market-in-south-east-asia)
32
A. T. Tri Co, Ltd, Presentation in Renewable Energy Asia 2014 in Bangkok, June 3, 2014
27
among the first choices due to its cheap, small size, and low moisture, compare with other
biomass such as palm oil residue. The rice would provide the fuel to biomass power plants for
combustion to generate heat, and/or electricity. The power can then be sold for revenue.
Market Potential
A study by Thailand’s Department of Alternative Energy Development and Efficiency has shown
that, the biomass from rice remains under-utilized (see Table 5). In Thailand, just the biomass
from rice feedstock alone will provide an investment potential of almost 870 megawatts
(MWe33) or about 80 to 170 biomass power plant projects, considering the size of biomass
power plants range from smaller than 1 to 20 MWe. As rule of thumb, 1 MWe is enough to
power 800 to 1,000 homes 34.
Table 5: Potential of Biomass from Rice
Biomass
Type
Potential Quantity
(tons/year)
Utilization
Rate
Market Investment Potential
(Approx.)
(tons/year)
Rice Husk
Rice Straw
4,597,578.06
10,727,682.14
80.1%
10.1%
916,899
9,640,908
MWe
82
786
(Source: Thailand’s Department of Alternative Energy Development and Efficiency & Author’s
analysis)
Renewable Energy Policy
The Thailand government, Ministry of Energy has enforced an energy policy to promote the use
of biomass as the fuel for generating electricity through SPP (Small Power Producers) and VSPP
(Very Small Power Producers) programs.
In the early 2000s, the Thailand government has approved the SPP and VSPP programs
encourages the private sector to an even stronger role in the electricity supply industry of the
country by allowing private sectors to generate and sell electricity to the power utilities. In
particular to the use of biomass, with the government offers a buyback price of electricity at a
premium via the Adder and simplified the procedure for obtaining license permit 35. The Adder
incentive scheme is an additional purchase price per kW-hour on top of normal tariffs
calculated in accordance with formula under the relevant SPP or VSPP regulation (See Table 6)
33
Megawatts (electricity); the electricity generation capacity
Division of Agriculture and Natural Resources, University of California, (http://ucanr.org/WoodyBiomass)
35
Thailand’s Ministry of Energy
34
28
for the current Adder rate as of 2014). In an attempt to discourage speculators of the PPAs36,
the government has mandated (1) a bid bond 200 Baht/kW for VSPP applicants who would
generate power of more than 100 kWe, and (2) no adder will be given if the project cannot start
selling power within 1 year after the committed commercial operation date 37.
Table 6: Thailand's Adder Scheme for Biomass Energy
Biomass Power
Production
Adder
(Baht/kWh)
Up to 1 MW
0.50
Special Adder (3 Southernmost
Provinces38 and 4 Districts in
Songkhla)
(Baht/kWh)
1.00
More than 1 MW*
0.30
1.00
Term from
Commercial
Operation Date
7 Years
7 Years
(Source: Baker & McKenzie’s presentation in Climate Thailand Conference 2010)
The SPP scheme is for power plants selling power to the Electricity Generating Authority of
Thailand39 (EGAT) of more than 10 MWe up to 90 MWe, while the VSPP scheme is for power
plants selling power to the Metropolitan Electricity Authority (MEA) or Provincial Electricity
Authority (PEA) 40 of not more than 10 MWe.
Tax Incentives41
In addition, by investing in renewable energy, the biomass power plant project would enjoy
exemption on corporate income tax for 8 years (without cap on profit). After that, it is taxed at
half the normal rate i.e. 10%42 for 5 year after the exemption period. Investors are also eligible
for double deduction for cost of transportation, electricity and waters for 10 years from the
date of first income derived, as well as deduction from net profit of 25% of investment in
infrastructure installation and construction costs, in addition to normal capital depreciation.
There is also exemption on import duty for equipment for certain years depending on the
capacity of the plant. For equipment of power generation capacity less than 10 MWe i.e. VSPPs,
36
PPAs are usually secured prior to project construction, hence there are speculators that who are trying to “flip”
the PPAs by selling to developers to earn a quick profits.
37
Thailand’s Ministry of Energy, Department of Alternative Energy, Development and Efficiency (DEDE)
38
Yala, Pattanee and Narathivas
39
EGAT is a state enterprise that owns and manages the majority of Thailand's electricity generation capacity, as
well as the nation's transmission network.
40
MEA and PEA are the distributor of electricity in Thailand Most of EGAT's electricity is sold to the Metropolitan
Electricity Authority (which supplies the Bangkok region) and the Provincial Electricity Authority (which supplies
the rest of Thailand).
41
Thailand’s Board of Investment (http://www.boi.go.th/tir/issue/201311_23_11/42.htm)
42
Thailand 2014 Corporate Income Tax is 20% for private company with net profit over 1 million baht, Thailand
Revenue Department
29
imports of equipment are tax free. From the implementation till now, VSPPs serve as the
driving force of the adoption of biomass energy.
Political Assessment
It should be noted that, apart from these favorable investment incentives. Investors’ appetite is
also influenced by political instability which might change the favorable terms that investors
enjoy. Thailand’s more than a decade long political unrest has caused economic damage. The
political instability will definitely be a priority and assessed by investors when entering Thailand
market.
Market Players
Private investments can be done through renewable energy project developers like Asia Biogas,
Clean Technologies Thailand, Ratchaburi Electricity Generating Holding Company Limited,
Electricity Generating Public Company Limited and BioMass Power Company Limited, and rice
mill owners, for instance, Mungcharoenporn Family, are actively initiating new biomass deals
and are constantly seeking capital to expand its portfolio. Local and foreigner investors,
assuming the “money” partner role, such as Bangchak Petroleum, Federation of Thai Industries,
Thai Polycons Public Company Limited and Electric Power Development Company (Japan)
partner with the renewable energy developers to develop new biomass power plant projects.
In the current biomass investment market, the market players are mostly dominated by
investors and firms with specialized technical knowledge about renewable energy and/or
traditional power production. It is because the biomass investment market is young and still
developing, private equity and venture capital firms are not very active in the market. This
could be due to the “lack of technical insight” and “lack of information i.e. transparency”
barriers that are stopping financial institutions from entering the market.
The next chapter would discuss the biomass energy asset class and its investment process in
greater details.
30
Chapter 4 Biomass Energy Investments
4.1
Introduction
A biomass power plant can add value to existing plots of land by converting a traditional cost
(waste) into a revenue stream. The term “biomass” in this thesis refers to the by-product,
residue or waste-product of other processes, such as farming, animal husbandry and forestry.
The waste i.e. the agricultural residues would provide feedstock to the biomass power plants
for combustion to generate heat, and/or electricity. The power can then be sold for revenue.
This chapter would review the various components of biomass investment process and provide
an overview to guide investors the process of investing in biomass power plant project i.e. the
Biomass Investment Decision Process. In this chapter and for the development of the Biomass
Valuation Model (BVM) in chapter 5, this thesis would use Thailand as the geographical focus
and rice husk as the feedstock.
There are also agricultural products specifically being grown for biofuel production i.e. energy
crops (A brief introduction is provided in Appendix 2). These include, for example, corn
(U.S.), sugarcane (Brazil) and palm oil (ASEAN).
4.2
Biomass: Characteristics
The Biomass industry, although is grouped under infrastructure, it has its own set of unique
characteristics that constitute a combination of infrastructure and real estate asset. Biomass
energy assets, for instance, (1) can range in a variety of scale understand general infrastructure,
although mostly small-medium scale production (0–20 MWe), (2) location is very important like
real estate when developing a biomass power plant considering the demand for power and
supply of biomass feedstock, (3) biomass pricing is not subject to monopolistic control because
it is provided by several small-medium local suppliers, and (4) biomass power plants can be
privately owned in comparison to having a long term contract lease with the government.
In a lot of ways, biomass energy assets are similar to traditional real estate and infrastructure.
Its stable cash flows, long term investment horizons and attractive returns are some similarities.
On the other hand, biomass energy assets are characterized by the production inputs and
revenue generators. The supply of feedstock is crucial, and biomass energy assets have multiple
revenue generators i.e. sale of power (electricity and heat), carbon credits and sale of fertilizer.
Furthermore, favorable regulatory policies make biomass energy assets more distinct. The key
characteristics of biomass energy assets are shown in Figure 10.
31
Figure 10: Characteristics of Biomass Energy Asset
(Source: Author)
Risk-Return Consideration
Investors (institutional and private)43 have numerous possibilities to allocate their money and
these are based on risk-return requirements of the specific investor. Institutional investors are
typically banks, pension funds, insurance companies, and hedge and mutual funds. Pension
funds and insurance companies, for instance are focused on asset liability management. In
making their investment decisions they will consider if their portfolio is able to produce a return
which will match their future liabilities, such as pension payments. The risk involved is naturally
an important factor in assessing attractiveness of a specific biomass investment.
Private investors include individuals, private equity and venture capital companies. For them,
liabilities are generally not the driving aspect of investment decisions. They are specialized
investors with specific industry knowledge who are interested in investment with high risks and
high rewards 44. Considering the characteristics45, scale46, and relative immaturity 47 of biomass
43
Zacks Research, Private vs. Institutional Investors, (http://finance.zacks.com/private-vs-institutional-investors-6252.html)
Refer to Figure 3 in Section 2.5
45
Refer to Figure 8 in Section 4.2
46
Refer to Section 3.4
44
32
investments in the ASEAN region, this thesis will mainly focus on direct investment and private
investors i.e. private equity and venture capital investors.
4.3
Biomass Power Generation Using Combustion Technology
There is a diverse array of technologies to convert biomass resources into higher value products
such as liquid and gaseous fuels or chemical products via thermochemical, biochemical or
chemical means. However, most of these technologies are still not cost competitive. Currently,
biomass resources are mainly used in the production of heat and electricity, and direct
combustion is one of the most common methods. Direct combustion also showed the greatest
potential for large scale utilization of biomass energy.
Other thermochemical conversion technologies like pyrolysis and gasification lack maturity and
reliability and are not economically viable for large scale utilization. As such, they are certainly
not the most feasible options for investment at present48. Therefore, investment in biomass
power plants that use direct combustion technology would be the most viable options.
Figure 11 is a graphical representation of the biomass power generation process. Biomass is
combusted in the power plant, which generated power i.e. electricity and/or heat (see orange
arrows in Figure 11). Using a combined heat and power systems or known as cogeneration
system i.e. generate both electricity and heat as output greatly increases overall energy
efficiency of the biomass power plant.
47
48
Refer to Section 2.6
IRENA, RE Technologies Cost Analysis, Biomass (http://www.irena.org/DocumentDownloads/Publications/RE_Technologies
_Cost_Analysis-BIOMASS.pdf)
33
Figure 11: Biomass Power Generation Process
Biomass Power Generation Process
Feedstock
Power Generation
Power
Biomass Power Plant Development Process
Site Selection
Plant configuration and technology selection
Sale of output
(Source: Gestore dei Servizi Energetici GSE S.p.A, GSE49)
4.4
Biomass Power Plant Development Considerations
On a real estate perspective, the development of a biomass power plant operates on a 3 step
process that entails, first, selecting the site i.e. availability of the feedstock, water supply and
grid network, second, selecting the optimal plant configuration and technologies, and third,
securing buyers of electricity and heat power, carbon credit and rice husk ash (see blue arrows
in Figure 11 above). These items are discussed in detail below.
Site Selection
Biomass power plants are usually developed near agricultural production areas or farmlands,
which are away from the city. In general, the site should be in proximity of biomass sources and
the Electricity Generating Authority of Thailand 50 (EGAT) transmission system or substation but
should be distant from the community to avoid adverse environment and health impacts during
construction and operations.
49
GSE (http://www.gse.it/en/easyenergy/Guide/Bioenergy/Pages/default.aspx)
EGAT is a state enterprise that owns and manages the majority of Thailand's electricity generation capacity, as
well as the nation's transmission network.
50
34
Water Supply
In power generation, water is required as steam is required to drive the steam turbines. The
project needs to ensure the availability of water resources within or near the site area. Source
of water would include surface water from river, steam, canal, or underground water. It will
generally include collection and analysis of water quality data, a preliminary plan of raw water
supply, and a treatment process of the raw water for these sources. As a guide, the estimated
water use per day is about 120 m3 for generating 1 MWe of power51.
Feedstock Supply
The feedstock supply is the key factor in heat and power generation. It is necessary to ensure
the feedstock’s sufficiency during the power plant operation. As a guide, for generating 1 MW
of power per year, estimated amount of rice husk needed is approximately 10,000 tons per
year. Investors would also have to keep in mind the cost of the feedstock and transportation
from the various sources. The 5 main factors52 regarding feedstock supply are as follows,
1. The amount of biomass each year and its consistency in the occurrence.
2. Easy to assemble and transport.
3. Properties of the biomass, such as size, availability of use without pre-processing,
moisture content, ash content and heating value.
4. Suitable technology to be used to increase efficiency and mitigate impact on the
environment.
5. Community agreement of use
Technology Selection
Appropriate selection of the technologies to be used, such as the steam generation systems,
power plant generating capacity and air emission control system is critical towards the
uninterrupted operation of the power generation process. The emissions from the biomass
plants mostly including such as particulates must be controlled within the standards specified
by Ministry of Industry, and Ministry of Science, Technology, and Environment. Emissions that
do not follow the standards are subjected to stoppage of operation by the regulatory
authorities. Therefore, any disruption to the operation would results in loss of income, higher
maintenance cost and compensation to the buyer of the power generated.
51
Thailand’s National Energy Policy Office, Thailand Biomass-Based Power Generation and Cogeneration Within
Small Rural Industries, 2000
52
Thailand’s National Energy Policy Office, Thailand Biomass-Based Power Generation and Cogeneration Within
Small Rural Industries, 2000
35
Hence, the dynamics between the technical and contractual aspects of the equipment supply is
extremely crucial, as the equipment are the main attribute to income generation. The
contracting issues in the equipment supply contract should be carefully negotiated. Some of the
key concerns to hedge the investors’ risks could include performance guarantees, liquidated
damages for non-compliance, stipulating guarantees and penalties for delays or poor
performance.
Revenue Generators
The main revenue stream of the biomass projects comes from sales of electricity and/or heat
generated the combustion of biomass in the power plant. Revenue can be generated in terms
of electricity through sales to the various options: (1) the national power grid, (2) the host i.e.
the source of the biomass, and (2) neighboring industries and communities, serving as a minigrid for the vicinity. In Thailand, the first option serves as a more feasible option as the
government has favorable renewable energy policies i.e. Very Small Power Producers (VSPPs) 53
and Small Power Producers (SPPs)54 schemes that agree to buy the electricity at a premium.
Prior to the development of the biomass power plant project, the price of the feedstock and
sale of power are negotiated and agreed upon with the potential power purchasers and
feedstock suppliers. The terms and conditions are secured by the power purchase agreements
(PPAs) and feedstock supply agreements (FSAs). These contracts are usually long term contracts
that range from 20 to 25 years. For commercial real estate, the leases period are usually 5 to 10
years with/without renewal option. Hence the cash flows of the biomass investments are
usually more stable and predictable in the long run than real estate assets. (Note: Since the
biomass power plant projects in Thailand are usually small-scale, the thesis would focus on the
VSPP program55,56,57 only i.e. power generation capacity of up to 10 MWe58.)
An additional source of revenue could come from sales of certified emission reduction (CER)
credits or carbon credits, each equivalent to one ton of CO2, through the Clean Development
Mechanism (CDM). The biomass investor could extract the value of the carbon credits through
establishing the Emissions Reduction Purchase Agreement (ERPA) with the buyers. The carbon
53
For power plants’ capacity less than 10 MWe
For power plants’ capacity of 10 to 90 MWe
55
For a VSPP with the contracted sales capacity greater than 1 MWe, 2% of the total amount of energy sale would
be deducted for the administrative and operating cost for the purchase of power.
56
VSPP would need to pay for the interconnection costs to the grid which range from 77,000 to 110,000 Baht.
There would be an additional cost of 200,000 Baht if connected to the grid outside of the metropolitan area i.e. the
Bangkok region. There is also the cost of distribution system construction and modification on a case-by-case basis.
57
For the VSPP regulation details , please see : http://www.eppo.go.th/power/vspp-eng/Regulations%20-VSPP%20Renew54
10%20MW-eng.pdf
58
Megawatts (electricity); the electricity generation capacity
36
credit price ranged from its peak at $20 a ton, before the global financial crisis in 2008-2009 to
about $0.50 a ton currently.
Another additional source of revenue could come from the sale of biomass ash. The ash of the
rice husk after the combustion process is known as RHA is a general term describing all types of
ash produced from burning rice husks. In practice, the type of ash varies considerably according
to the burning technique depending on the technology selected. Rice husk is unusually high in
ash compared to other biomass fuels – close to 20%. The ash consists of 92 to 95% of silica.
Hence the rice husk ash could be sold for industrial and manufacturing needs such as insulator
in the steel industry, manufacture of lightweight insulating boards and for silicon chip
manufacture59. This eliminates the cost of biomass ash disposal and generates additional
revenue.
Construction
The construction of the biomass power plant and installation of the specialized biomass energy
equipment is an important stage of the project. The selection of a suitable Engineering,
Procurement and Construction (EPC) contractor is crucial. The contractor should have the
specialized technical competency, prior experience, and financial strength to execute the
project in accordance with the costs, production, and time specifications. Some of the
contractors with the relevant expertise include, SBANG Corporation Ltd., LAWI Engineering, APower Energy Generation Systems Ltd and ENSYS.
Operation and Maintenance
To ensure that the cash flow to the project is stable, the biomass power plant has to be
functional and reliable i.e. operating on schedule with no breakdowns that would cause any
delays. Asset management such as having meetings and teleconferences with the project
company’s management team, obtaining regular management reports of key issues (technical,
operation, regulatory, etc.), monthly financial statements, annual financial statements, regular
site visits to the biomass power plant projects are important to keep abreast of the biomass
power plant operation. These would ensure the success of the deal.
There are different options available for the operation and maintenance (O&M) of the power
plant. Project sponsor and investors can decide between having an in-house O&M team and
outsourcing the O&M component. The former would be ideal if the project sponsor, for
instance, a specialized renewable energy project developer, has the relevant knowledge and
experience in O&M of biomass power plant and already has its team of O&M specialists. The
59
Rice Husk Ash Market Study, Bronzeoak Ltd, 2003
37
advantages would be lower cost and more control of the O&M status of the power plant. The
latter would be ideal, if project sponsor, in the case of a rice mill owner, has no expertise in this
area. The advantage of outsourcing is that the performance of the operation could be
guaranteed and liquidated damages could be imposed for poor performance. A good O&M
contract with a reputable O&M firm can also strengthen the case of the project in obtaining
project financing from the banks.
Licensing and Permitting
Similar to real estate development project, licensing and permitting are required for the
construction of biomass power generation facilities in Thailand, as well as the agencies
responsible for review and approval. The necessary permits and clearances usually have a
sequence to abide to. Hence it is important to be familiar with the rules and regulations avoid any
delays to the biomass power plant project (see Appendix 3 for more info on Thailand’s licensing
and permitting for biomass power plant development projects).
Risk
In addition, if the project is not able to comply with the regulatory requirement, for example the
Environmental Impact Assessment (EIA) and Health Impact Assessment (HIA), investors will face
the risk of resistance by the community (Juntarawijit 2013). This could result in suspension of the
project development, the power plant's license being revoked 60 , 61 and opposition by the
community for future developments (Kongbuamai, Manomaivibool & Remmen 2012).
4.4
Investing in Biomass Power Plant Projects
Nature of Biomass Power Plant Project: Greenfield Development
Biomass power plant projects are mainly greenfield development that are higher risk projects
that may provide little or no income while the asset is constructed, usually for 1 to 2 years but
have higher potential for capital growth during the construction and closing phase. Additional
investments may be required at various points of the construction phase.
Although biomass power plant have a significantly increased risk profile, in part because of
construction risk, their cash flow projections could be secured due to be PPA (Power Purchase
Agreement) with the relevant Thailand authorities that could be 20 to 25 years in length. The
60
The Nation, Locals sue to revoke license, May 7, 2014 (http://www.nationmultimedia.com/national/Locals-sue-to-revoke-
licence-30233036.html)
61
Bangkok Post, Thai villagers win dispute over husk-fired power plant, June 25, 2013
(http://www.bangkokpost.com/news/local/356817/power-plant-has-licence-revoked)
38
PPA is usually negotiated and agreed upon before the commencement of the project. Therefore
the return profile would suit an investor looking for higher returns, which in some cases can
exceed 20% per year and willing to accept much higher levels of risk than an operating asset
(see Figure 12). In the VSPP program, investors also enjoy tax privileges and subsidy i.e. adder62.
This two policy mechanisms would provide an additional 2-3% each to the expected IRR for
equity investments in biomass projects63. The payback period for power plant investment
projects in Thailand in the current market is about 5 to 7 64,65 years.
Figure 12: Risk-Return for Greenfield Biomass Projects
(Source: RREEF Research)
Biomass Power Plant Project Structure
When investing in a biomass power plant project, the project structure is similar to real estate
investment (see Figure 13). The Limited Partner(s), who could be local (Thai) and foreigner
equity investors including venture capitalists, private equity firms 66 , feedstock owners 67 ,
feedstock suppliers, investors, manufacturers and distributors of machinery, and communities,
62
Adder is an incremental increase in the price paid per kWh of biomass power generation benchmarked to the
feed-in grid rate
63
International Renewable Energy Agency, Financial Mechanisms and Investment Frameworks for Renewables in
Developing Countries, 2012
64
Industrial Power Technology Pte Ltd, Renewable Energy In Asia – From Rice Fields To Palm Oil Plantations
(http://www.ipttech.net/PoweringAsia.pdf)
65
Energy Management and Conservation Office, Khon Kaen University, Thailand Biomass Utilization Activities in
Thailand (http://www.apip-apec.com/ja/policies/upload/3DRKAN~1.PDF )
66
VCs and PEs are still not yet very active in the biomass investment market
67
By having the feedstock owners on-board would help to ensure the stability of the feedstock supply
39
and the General Partner (GP), who is the project sponsor 68, usually specialized biomass
investment firms such as renewable energy project developer or the feedstock supply owners
themselves.
As biomass investment market is still relatively immature, the Initial Public Offering (IPO) route
is still not very common. The project sponsor could extract the value of its investment by selling
its equity back to feedstock owners who invest at agreed prices or sale of shares to the other
strategic investment partners of the project. On the other hand, the project sponsor could
extract the value of its investment by operating the power plant on a cradle-to-grave69 basis.
Figure 13: Conceptual Representation of a Biomass Power Plant Project Structure
Thai Investors
Foreign Investors
(e.g. VCs and PEs)
Feedstock Suppliers
Limited Partner(s)
Power Sector construction
Service Providers
Equity
Speclialised Equipment
Suppliers
Renewable Energy Project
Developers
Biomass Power Plant
Project Company
General Partner
Argiculture Facilities
Owners
Commericial Bank
Debt
World Bank and Asian
Development Bank
(Source: Author)
Biomass Power Plant Project Financing
68
69
Refer to Section 3.5 “Market Players” for select renewable energy developer
From project creation to disposal; throughout the life cycle
40
Project sponsors are typically renewable energy project developers, who are specialized buildown-operate-transfer (BOOT) firms or, build-own-operate-transfer (BOO) firms. For BOOT firms,
they typically own and operate the biomass power plant for a period of about 10 years before
transferring the ownership back to the facility owner who provided the feedstock. The BOO and
BOOT development models typically use project financing (see Figure 14). The flow of funds and
required documentation boxed in red), where the financing is based on project’s financial
viability i.e. project’s future income instead of the developer’s credit and asset, and the
project’s cash flow is the only source for debt payment. Financing is structure in a way that the
project company instead of the developer is the direct borrower. This separates the project
company from developer. Hence, in addition, there is limited, little recourse or even no
recourse to developers. The typical maturity of this type of loan is more than 10 years.
Figure 14: Project Financing Model
(Source: COGEN 3’s Presentation in 2004, Cogeneration Week in Thailand)
However complex documentation and security arrangements are required for this type of
financing. The documentations required are information memorandum and contracts such as
the Power Purchase Agreement (PPA), Engineering, Procurement, Construction Contract (EPC),
Fuel Supply agreement (FSA) and Environment Impact Assessment (EIA). The security
41
arrangements required is such as the assets pledged as security to the bank, assignment of
contracts to the bank (PPA, FSA, EIA, etc.), covenants related to shareholding structure,
issuance of dividends, additional loan, accounts pledged to the lenders and construction
guarantee.
The other possible project sponsor would be the owners of the facilities that generate the byproducts, for instance, rice mill owners. The investment value of biomass power plant projects
is beginning to attract the attention from the facilities owners. This is because biomass
investment can increase the value of property by highlighting a pre-existing but underutilized
and under-marketed by-product i.e. the agricultural waste. A biomass power plant is not only
an asset which generates revenues, but from a real estate perspective, it also creates additional
value to the owners’ existing farmlands.
The financing is usually done through corporate loan or on-balance-sheet financing (See Figure
15). Loan is made directly to owner, boxed in red). Project sponsor takes out the loan to finance
the project and the loan is reflected on the balance sheet of the sponsor. The advantages of this
financing arrangement are that the loan could be arranged quickly if conditions are met, and
the loan requires simple documentation and security arrangements. On the flip side, the
disadvantages are the risks are mainly carried by the sponsors and loan increases the debt
burden on the balance sheet of the sponsors. In addition, the repayment periods are not long,
normally less than 10 years, hence there is high level refinancing risk.
42
Figure 15: On-Balance-Sheet Financing Model
Loan to owner of
biomass power plant
(Source: COGEN 3’s Presentation in 2004, Cogeneration Week in Thailand)
Lastly, other means of financing can come from subsidized loan supported by the Thailand
government. In Thailand, initially the financial Institutes are still defensive about making loan to
small renewable energy projects as they lack the knowledge about renewable technologies. But
the credit environment for biomass power plant projects is favorable. Under the Thailand’s
Energy Conservation (ENCON) Fund 70, the government has loaned 4 billion baht to commercial
banks at 0.5% interest, where these banks provide government-backed loans at 4% interest, up
to 50 million baht or about $1.6 million71 per renewable energy project. However this financing
covered only equipment installation and upgrades consultation, civil works, piping,
transportation, and tax. Land costs, land improvement costs, and building construction projects
did not qualify for funding.
Institutions such as the Asian Development Bank and the World Bank generally also provide
funding to member countries. These multi-lateral agencies are usually very selective in
allocating their funds and it would be relatively more difficult to obtain funding from them.
Hence, they would not be covered in this thesis.
70
71
Thailand’s Ministry of Energy
$1 to 32 Baht
43
4.5
Biomass Investment Decision Process
In Section 3.5 to 4.4, the thesis has discussed the various biomass energy investment factors
and this section would summarize those discussions, and provide an overview of the biomass
development project structure (see Figure 16), as well as introducing the Biomass Investment
Decision Process. The thesis has identified the four main drivers of investing in a biomass power
plant project. They are namely (1) the project funding structure, (2) development and
construction costs involved, (3) the key revenue generators of the project when in a stabilized
operating phase and, (4) the operating costs of the project when in a stabilized operating
phase.
The thesis has reviewed both the lessons learnt in biomass investments, and real estate
development methodology (Grecco 2014; Kohlhepp 2012; Coneg Policy Research Center Inc.
1998) to facilitate the introduction of the Biomass Investment Decision Process, which would
help to guide investors through the decision processes that would usually be involved (see
Figure 17). The thesis would zoom in further to develop the Biomass Valuation Model (BVM) as
indicated in Figure 17, boxed in red. The model is a technical-financial model to help investors
in evaluating the feasibility of biomass investment and selecting the suitable projects.
44
Figure 16: Biomass Power Plant Project Development Overview
(Source: Baker & McKenzie’s presentation in Climate Thailand Conference 2010. Author has made modifications for illustration
purpose)
45
Figure 17: Biomass Investment Decision Process
Macro-level Analysis
Micro-level Analysis
Feasibility and Selection
•Country Analysis
•Political Climate
•Market Trend
•Government
•Environmental guidelines
•Incentive Policies (VSPP, tax,
feed in tariffs)
•Stakeholders (Developers,
land owners, feedstock
suppliers, contractors,
consultants)
•Equity investors (numbers,
who are they, commitment
level)
•Structure of the investment
(BOOT, BOO)
•Financing (Commercial,
Subsidised)
•Revenue (Power sales, CER,
ash)
•Investment and operating
cost
Due diligence
Construction
Operation and Maintenance
•Land issue (Zoning, permit
to utilize land, location as
per PPA)
•Contracts negotiation
•Shareholders agreement
•Loan agreement
•Licensing and Permitting
•PPA, FSA, EIA
•Grid’s consent required for
the assignment of rights and
novation (EGAT, PEA, MEA)
•EPC Contractor
•Construction permit
•Project delivery method
•Technical issues
•Liquidated damages (Delay
rate per day, Performance
bond)
•In-house vs outsource
•Asset management
•Energy Operation License
(Power generation license,
Power distribution license)
•Controlled Energy Permit
Divestment
•Power plant valuation
•Sale to facility owner
•Sale to strategic partners
(Source: Author)
46
Chapter 5 Biomass Valuation Model (BVM)
5.1
Introduction
Investors often lack the understanding of the technical and financial complexities involved
when investing in biomass power plant. In addition, little has been published about specific
biomass deals as it is still a young and evolving market. Confidentiality due to competition in
the current market is another explanation for this lack of transparency. However, several
successful developments have been completed and can be applied when developing the
Biomass Valuation Model (BVM) with hindsight. In the development of the BVM, the model
would be making reference to two biomass development projects A.T. Biopower Rice Husk
Power Plant72 (9.9 MWe73) located in Tha Ruea district, Ayutthaya Province, Thailand, and GIZ74
Biomass Power Plant75 (1 MWe) located in Aumpur BanFhang district, Khonkaen Province,
Thailand.
Hence to leverage on the growing trend of biomass investment, investors have to overcome the
technical barriers when investing in biomass power plant projects. Therefore, there is a need to
integrate both technical and financial analysis by constructing the BVM to help to determine
the viability of projects more effectively.
5.2
Methodology
The primary objective of the Biomass Valuation Model (BVM) is to develop a model that could
allow the critical technical and financial components to communicate effectively, which would
help to determine the feasibility of the biomass investment project with greater certainty. The
BVM also determine the investment cost required for the technology, i.e. process, design and
equipment, for the project.
This model is intended for the pre-evaluation of biomass investment projects and is developed
in Excel®. The BVM can calculate and analyze the projected financial performance of a biomass
on project. Energy production streams i.e. electricity and heat are modeled on an annual basis
to create financial calculations.
72
Refer to http://cdm.unfccc.int/Projects/DB/RWTUV1353663131.54/view for information on the A.T. Biopower Rice Husk
Power Plant
73
Megawatts (electricity); the electricity generation capacity
74
GIZ refer to Deutsche Gesellschaft für Internationale Zusammenarbeit, an international enterprise owned by the
German Federal Government
75
Refer to http://www.adicet.cmru.ac.th/waef2012/document/S1-5Supalerk.pdf for information on GIZ Biomass Power Plant
47
The approach this thesis has taken for developing the BVM is as shown in Figure 18. In the
development of the model, the thesis would first start with the technical aspect by building a
theory biomass power plant model, which is however often neglected by investors with no
technical expertise, and then move on to the financial aspect to determine the viability and
financial performance of the project.
Figure 18: Approach in Developing the BVM
Technical
Financial
BVM
•Establish operating parameters for 1-10 MWe biomass power plant
•Enhancement for more realistic economic considerations, such as additional
cost and equipment not considered previously but required with the current
regulatory and market situtation
•Determine biomass plant configuration
•Develop biomass power production model i.e. the "power plant"
•Determine power generation capacity based on feedstock type and amount
and process heat generated
•Estimate development and construction cost based on biomass plant
configuration and capacity
•Financial assumptions, policy and tax incentives, and growth rates
•Develop Biomass Financial Model
•Project revenues of biomass power plant i.e. Electricity, Process Heat, Biomass
Ash, Carbon Credits
•Biomass Valuation Model (BVM)
•Projected Cash Flows
•IRR, NPV, Effects of Tax
•Parametric/Sensitivity Analysis
(Source: Author)
Lian has provided a prototype of the operation of a small scale biomass power plant of 1 to 5
MWe76 based on exergy basis 77. The power plant’s governing operating technical parameters
are such as the biomass boiler system configuration, turbine generator type and pump systems’
efficiencies and the steam thermodynamic properties at various stages of the power generation
operation (Lian, Chua & Chou 2010). These technical considerations are crucial towards the
financial analysis of the biomass power plant as they have a direct impact on the revenues
generated.
76
77
Megawatts (electricity); the electricity generation capacity
Exergy is a thermodynamic property which accounts for quality of energy.
48
Lian’s model is developed based on a tri-generation power plant system i.e. generates
electricity, heat and cooling. However, the scope of this thesis would be on co-generation
power plant i.e. generates electricity and heat, which is the most commercial viable and
attractive to investors. In addition, the prototype is for power plant of 1 to 5 MWe, hence a
modification has to be made to the plant configuration to generate an electricity capacity of 1
to 10 MWe. Lastly, as discussed previously, Lian’s model is based on the concept of exergy,
which is more of an academic exercise. The thesis will convert Lian’s model to an energy basis.
Hence, after incorporating the mentioned differences, Lian’s model would be used as the base
model of the modeling the technical aspect of the BVM.
5.3
Development of Biomass Valuation Model
5.3.1 Technical Considerations for Biomass Power Plant
Establish Operating Parameters for 1-10 MWe Power Plant
First, is to define the electrical power required to operate the biomass power plant, which is 1
MWe. Next, is to define the standard ambient condition for thermodynamic calculations, which
is set at ASEAN’s climate. Lastly, is to define the operating parameters of biomass waste boiler
for combusting the biomass feedstock, steam turbine generator to generating the electricity,
and other auxiliary systems like water pumps, de-aerator and water condenser (See Appendix 4
for the detailed assumed technical operating parameters).
Since the plant capacity is small and feedstock used in for the power plant proposed is rice husk
with high ash content, traveling grate-fired boiler is the preferred choice (Venus Energy Audit
System n.d.) (See Appendix 5 for technical explanation). In addition, the steam turbine, which
has multiple-stage power generation, is used for electricity generation capacity of up to 10
MWe (see Appendix 6 for technical explanation). This turbine is characterized by higher
efficiency than small steam turbines of up to 5 MWe that has fewer stages or just one stage.
Enhancement for more realistic economic considerations
In developing the biomass power plant model, the thesis will also consider some enhancements
to Lian’s model for more realistic economic considerations. First, is the use of the use of water
from the utilities for the production of steam as process heat. The cost of water is simply, Cost
of Water = (Volume of water used) X (Price of water). The price of water is assumed to be 16
49
Baht per cubic meter78. The volume of water would depend on the process heat output of the
power plant, which is specified by the user.
Second, it is the cost of connecting to the grid. The cost of connecting to the grid would be
based on the guidelines provided by the VSPP regulation. The total cost is a sum of the cost of
distribution system construction and modification, cost of synchronization pattern checking,
cost of protective equipment testing, cost of additional meter installation, installation cost for a
synchronizing check relay at a utility’s sub-station. The total cost ranges from 200 thousand to
27 million Baht (see Appendix 7 for cost breakdown).
Lastly, third, it is the cost of cleaning the flue gas (the exhaust/fumes from the combustion of
biomass feedstock). Emission of particles smaller than 10μm (PM10) is considered a health
hazard. Hence, cyclones are used biomass combustion facilities to remove these harmful
particles. The cost of cleaning the flue gas is simply, Cost cyclone = 3416 X V̇ f0.85, where V̇ f is the
flue gas flow rate, which would be calculated by the model (See Appendix 8 for details of the
derivation). Electrostatic precipitators (ESP) and fabric filters (FF) are more effective in meeting
stringent particulate emission standards. But many biomass combustion facilities are operating
at small to medium scale due to the limitation of feedstock availability. Hence the use of ESP
and FF are not economical for small scale combustion units as the high operating and
maintenance cost far outweighs the benefits of the increase in flue gas cleaning efficiency.
Therefore it will not be considered in this thesis.
Determine Biomass Plant Configuration
Adopting from Lian’s power plant design, the biomass plant configuration is as shown in
Appendix 9. Based on the assumed operating parameters of the biomass power plant, the
steam conditions and flue gas conditions at various stages of the power generation process
would be determined (See Appendix 10 and 11 for steam and flue gas conditions to be used in
the power plant model).
Build Biomass Power Production Model
With the all the technical operating parameters in placed, the biomass power production model
is then developed Excel®. The production process is as shown in Figure 19.
78
Business in Asia, July 20, 2014
(http://www.business-in-asia.com/investment_costs2.html)
50
Figure 19: Biomass Power Production Model
Feedstock Type and Amount
Electricity Generated
Biomass Power
Electricity Generation
Capacity
Production Model
Process Heat Generated
"Power Plant"
Power Plant Efficiency
(Electrical, Thermal, Total)
Process Heat Sale Amount
(Source: Author)
5.3.2 Financial Considerations for Biomass Power Plant
Determine Power Generation Capacity
The biomass power plant’s electricity generation capacity would be dependent on the
feedstock type and the amount that it is available annually, as well as the process heat
generation requirement. The Biomass Power Production model has included a list of biomass
feedstock data that can be selected when analyzing the power generated (see Appendix 12). In
the Biomass Power Production model, the following assumption has been made in Table 7 and
the results is as shown in Table 8.
Table 7: Power Generation Capacity Assumptions79
Feedstock Type Available :
Feedstock Amount Available :
Amount of Process Heat Sale :
(Source: Author; BVM)
79
Ref: A.T. Biopower Rice Husk Power Plant
51
Rice Husk
77,438 ton/year
177,920 ton/year
Table 8: Power Generated Results 80
Fuel Input :
Electricity Generated for Sale :
Electricity Generated Consumed :
Process Heat Produced :
30,927 kW
8.8 MWe81
1.0 MWe82
Efficiency
Total electricity
generation capacity:
9.8 MWe
16.2 MWt
Total Energy Efficiency:
Total Operating Efficiency (Defined as Saleable Energy/Fuel Input):
Electrical:
31.70%
Thermal:
52.47%
84.18%
80.94%
(Source: Author; BVM)
Estimate Development and Construction Cost
Based on the annual amount of the feedstock, process heat for sale and projected total
electricity capacity, the Biomass Power Production Model would then determine biomass
power plant configuration. Next, the thesis would estimate the investment cost required for the
determined plant configuration.
Investment cost of equipment is most detailed and accurate when obtained from vendors of
specific models. A convenient yet reliable way to project the numbers is through an
approximate and compact form, as shown in Appendix 1383, which has been adopted by Lian
(Lian et al. 2010). The coefficients also take into account installation, electrical equipment,
control system, piping and local assembly. A 50% premium is added to the equipment cost to
be conservative. Based on the project power capacity of 9.8 MWe the cost of equipment is as
shown in Table 9.
80
Results somewhat similar to A.T. Biopower Rice Husk Power Plant
Megawatts (electricity); the electricity generation capacity
82
Megawatts (thermal); the thermal generation capacity
83
Included the Cost of cyclone derived in Appendix 8.
81
52
Table 9: Investment Costs of Equipment Based a Project 9.8 MW Capacity
(Source: Author; BVM)
Next the thesis will use the following assumption for estimating the cost of land, consultancy
services, construction services, factory building and office building, and connecting to the grid.
For a 10 MWe biomass power plant, the land area required is about 40,000m2 (430,55684 SF)
and thesis will assume that for every 1 MWe capacity, 4,000 m2 of land will be required (see
Appendix 14 for a sample of the distribution of land use). The cost of land (farmland or rural
land) is assumed to be 200,000 Baht/rai85. The cost of construction services cost would be 600 86
Baht/m2. The consultancy fees i.e. engineering, design, permitting and licensing is assumed to
be 288087 Baht/kW. The cost of materials for a factory building and office building is assumed to
be 500 Baht/m2. The estimate costs and their distribution are as shown in Table 10.
84
State Level Environment Impact Assessment Authority, Government of lndia
(http://www.seiaacg.org/ecgranted/Shyam%20Warehosing%206-5-2010.pdf)
85
1 rai is equal to 1600m2
Thailand's Board of Investment data (http://www.boi.go.th/upload/content/AW_BOI-Costs2014-20130905-web_80718.pdf)
87
World Bank’s estimate $90 per kW (http://siteresources.worldbank.org/EXTENERGY/Resources/33680586
1157034157861/ElectrificationAssessmentRptAnnexesFINAL17May07.pdf)
53
Table 10: Investment Costs of Preliminary and Construction Phase
(Source: Author; BVM)
Financial and Economic Assumptions
Next, the thesis would define the parameters of the power plant’s operations, cost of
feedstock, revenue generators (sale of electricity, heat, biomass ash and carbon credits) and
the capital structure of the project. The policy and tax incentives as discussed in section 3.5 are
also incorporated into the model. The current corporate income tax rate is 20%, the real estate
tax is 12.5%88, the depreciation rate is assumed be a straight line depreciation of 25 years89.
Please see Appendix 15 for details and schedule of the loans.
This thesis will include the use of the soft loan i.e. the Thailand’s Energy Conservation (ENCON)
Fund (maximum of 50 million baht at 4% interest rate with a repayment period of 7 years). The
propose of the soft loan is to help small biomass power plant developers with less established
credit records to have easier access to credit facilities. Banks normally would not be very willing
to lend money to this group of developers. In theory, if the developers and investors have
adequate capital, they could use just the construction loan and permanent loan, which would
yield a higher IRR as compared to using a combination construction loan, permanent loan and
the soft loan. This is due to fact that there is also tax incentives (see section 3.4 for details),
specifically, the 8-year exemption of corporate income tax with no cap. However, as an
academic exercise, the thesis would include the soft loan as one of the financing sources to
cater to very small biomass power plant developers and to demonstrate the soft loan’s cash
flow pattern in the BVM. (Note: the BVM has the flexibility to exclude the soft loan according to
the user’s inputs.)
88
The thesis assumes the biomass power plant is required to pay house and land tax every year at the rate of 12.5%
of the annual rental value of the property i.e. the revenue streams of the power plant (http://www.bdothaitax.com/bdo/prop_tax)
89
The thesis’ proposed biomass power plant project’s operating life
54
The various economic operating parameters are as shown in the Table 11 – 15.
Table 11: Power Plant Operating Parameters
(Source: Author; BVM)
Table 12: Cost of Feedstock Parameters
(Source: Author; BVM)
Table 13: Revenue Generators Parameters
(Source: Author; BVM)
55
Table 14: Further Details on Revenue from Biomass Ash
(Source: Author; BVM)
Table 15: Capital Structure Parameters
(Source: Author; BVM)
Growth rate
The default growth rate assumed to 2.5% all applicable items 90,91. Taking into account of the
operations and maintenance of operating a biomass power plant, O&M expenses is assumed to
first grow at 2.5% from year 1-10 and 5.0% after year 10.
In addition, based on the expected wholesale electricity tariff from 2012 to 2030 by Thailand’s
Ministry of Energy (see appendix 16), the thesis will estimate the project growth rate of the
wholesale price of electricity. The estimated growth of wholesale price of electricity (20122021): CAGR2012-2021 = 4.22%, and the estimated growth of wholesale price of electricity (20222030): CAGR2022-2030 = 1.19%. The wholesale price electricity is assumed to first grow at 4.22%
from year 1-10 and 1.19% after year 10. As priority of climate change and the drive to cut
90
According to the Commerce Ministry of Thailand, inflation rate for 2014 is projected at 2-2.8%
(http://englishnews.thaipbs.or.th/thailand-inflation-rate-year-stay-2-2-8/)
91
Median forecast of inflation is 2.52% (http://online.wsj.com/articles/thailand-inflation-hits-14-month-high-1401689630)
56
carbon emission are dependent on economic growth92, the growth of the carbon credit would
be assumed to grow at the projected global economic growth rate at 3.7% 93 in 2014.
Assumption for NPV Calculation
The assumptions for NPV calculation are shown in the Table 16. For biomass power plants, a 1215% risk premium is assumed. A higher discount rate is assumed for levered cash flow is due to
fact that debt financing increases the risks of the biomass investment projects because the
loans’ principal and interest must be paid when they are due.
Table 16: NPV Assumptions
(Source: Author; BVM)
Build Biomass Financial Model
With the financial parameters in placed, the biomass financial model is constructed Excel®. The
production process is as shown in Figure 20.
Figure 20: Biomass Financial Model
Cash Flows
Financial and Economic
Parameters
Biomass
(price, FX, interest rate,
growth rate, tax)
Financial Model
IRR, NPV
(Source: Author)
92
93
See section 3.2 under CER/Carbon Credit
Data from IMF, (https://www.imf.org/external/pubs/ft/weo/2014/update/01)
57
5.3.3 Constructing the BVM
Next, the thesis would integrate the technical parameters with the financial drivers by
combining both the Biomass Power Production Model and the Biomass Financial Model to
construct the Biomass Valuation Model (BVM) in Excel®. The BVM would be able produce
financial outputs from the perspective of the biomass power generation process, equipment
design, and financial and economic conditions.
A schematic of how the BVM works is as shown in Figure 21. See Appendix 17A for the cash
flow model generated by the BVM with no leverage i.e. a 100% equity deal, and Appendix 17B
for the cash flow model generated by the BVM with leverage i.e. a 40% equity and 60% debt
deal. A graphical representation of the cost and revenue of the biomass power plant project
generated by the BVM is as shown in Figure 22.
On the next section, thesis would perform various analyses with respect to the five key
parameters as well as some other financial and economic parameters.
58
Figure 21: Biomass Valuation Model (BVM) Process
Revenue from Electricity
Generated for Sale
Feedstock Type and Amount
Revenue Process Heat
Generated
Biomass
Valuation Model
Power Generation Capacity
Financial and Economic
Parameters
Biomass
Power
Production
Model
Analysis
Cash Flow
IRR
Revenue from Biomas Ash
Biomass
Financial
Model
NPV
Investment costs
Revenue from Carbon Credits
(price, FX, interest rate,
growth rate, policy incentives
Investment Capital Required
(Source: Author)
59
Parametric Analysis
Figure 22: Cost and Revenue of the Biomass Power Plant
(Source: Author; BVM)
60
5.4
Analyses, Results and Discussions
The Biomass Valuation Model (BVM) is able to bridge the technical and financial to produce
financial outputs from the perspective of the biomass power generation process, equipment
design, and financial and economic conditions. The BVM has preselect five key parameters for
analysis (Users have the flexibility to change the key parameters). The key parameters and
corresponding IRR, NPV, and Cost and Revenue distribution are as shown in Figure 23.
Figure 23: Key Parameters for Analysis
(Source: Author; BVM)
61
Cash Flow Analysis
First the thesis would present the cash flow distribution generated by the BVM. As discussion in
section 4.4, based on the market research performed, the payback period for power plant
investment projects in Thailand in the current market is about 5 to 7 94,95 years. In the cash flow
distributions (unlevered and levered) presented in Figure 24, they reflected the same results
where the payback is about 5-7 years as well. The biomass power plant project is churning
positive cash flow in its first year of operation (see Appendix 18A for the levered cash flow
distribution).
Figure 24: Cash Flow Distributions (Unlevered and levered)
8-year exemption
of corporate
income tax with
no cap
5-year at half the
corporate income
tax rate
Full corporate
income tax rate
(Source: Author; BVM)
In addition, due to the large difference between the interest rate of the loans (the debt yields
range 6 to 10% - See Appendix 15 for the debt yields) and the IRR of the project (20.18%, before
tax and 19.65%, after tax), positive leverage is possible to achieve in Thailand’s biomass power
plant project (see Figure 25). There is a 10.5 percentage point increase in IRR (30.7%, before tax
94
Industrial Power Technology Pte Ltd, Renewable Energy In Asia – From Rice Fields To Palm Oil Plantations
(http://www.ipttech.net/PoweringAsia.pdf)
95
Energy Management and Conservation Office, Khon Kaen University, Thailand Biomass Utilization Activities in
Thailand (http://www.apip-apec.com/ja/policies/upload/3DRKAN~1.PDF)
62
and 30.24% after tax) after leverage using 40% equity and 60% debt (See Appendix 18B for the
comparison of unlevered and levered cash flow distributions).
Figure 25: Effect of Levered Cash Flow
(Source: Author; BVM)
Revenue Distribution and Cost Distribution
On the revenue side, the main driver of the revenue is the sale of electricity to the national grid,
constituting to 80.31% of the total revenue, attributed by attractive policy and tax incentives.
On the operating cost side, the main driver of the cost is the cost of feedstock, constituting to
72.23% of the total operating cost (see Figure 26).
As discussed in the previous chapter, when investing in a biomass power plant project, the 2
main contracts to secure are the FSA (Feedstock Supply Agreement) and the PPA (Power
Purchase Agreement), hence to be able to negotiate a below-market price of the feedstock will
help in increasing the return of the project. Also, the O&M (operations and maintenance)
expenses for biomass power plant are very high as compared to fossil fuel power plant and
other real estate types. The combustion of biomass fuel is expected to yield a higher
maintenance cost due to higher rate of ash fouling and slagging, thus boiler tubes and grates
have to be cleaned more often (Lian et al. 2010).
63
Figure 26: NPV of Revenue and Cost
(Source: Author; BVM)
IRR based on the Revenue Generators
In this analysis, the thesis will isolate the revenue generators and observe how each revenue
generator attribute to the IRR. The result for unlevered cash flow is presented in Figure 27 (see
Appendix 19 for the Levered Cash Flow).
Figure 27: IRR of Unlevered Cash Flow
(Source: Author; BVM)
64
Parametric Analysis (IRR Sensitivity Analysis)
The 5 key considerations in the operations of the biomass power plant identified previously in
Figure 23 are provided below for easy reference.
In performing the parametric analysis using the BVM, one parameter is varied while the rest of
the parameters are held constant. The default values of the parameters are also shown below.
In the parametric analysis, we would observe the variation of the IRR of the biomass power
plant project after tax cash flow with the variation of the key parameters. The property level
IRR (after tax) at the parameters’ default values is 19.65%. A ranking profile of the parameters
will be constructed to determine the impact of each of them on the investment decision making
process of biomass power plant projects. The concept behind sensitivity is based on an
understanding of elasticity. In economics terms, elasticity is the ratio of the percent change in
one parameter to the percent change in another parameter. It is used for measuring the
sensitiveness of a function to relative changes in parameters.
Figure 28 shows the variation of IRR (after tax) with each of the key parameter while other
factors remain unchanged. The sensitivity analysis is performed by varying the selected
parameter according to the specific percentage change of the parameter (range from -50% to
+50% with reference to the default values of the parameters) and then, the corresponding IRRs
(after tax) is observed.
Based on observation, when the respective parameter is varied from -50% to +50%, the price
electricity and price of feedstock are found to be the two most important factors affecting
biomass investment decision with the variation of IRR (after tax) in the range of 17.0% (for price
of electricity) and 10.4% (for price of feedstock). The parametric ranking of the five select
parameters that affect biomass investment decision is shown in Table 17. The carbon credit
parameter has insignificant impact on affecting biomass investment decision with only a 0.04%
variation in IRR (after tax). To understand more on the carbon credit parameter, this thesis
performed a projection of the price of carbon credit to $50.00 (or 100 times of its default value)
and the IRR (after tax) increase by about 3.80% i.e. IRR is 23.5% (see Figure 29). As discussion in
section 3.2, the drive for sustainable environment is greatly motivated by the nation’s GDP
65
growth. Therefore it is expected the price of carbon credit to be more significant as the global
economic growth environment picks up its momentum.
Figure 28: Parametric Analysis of Select Parameters
(Source: Author; BVM)
Table 17: Ranking of Parameters
Ranking Parameter
1
2
3
4
5
Variation of IRR when parameter
change from -50% to +50%
Price of Wholesale Electricity
Price of Feedstock
Price of Process Heat
Price of Biomass Ash
Price of Carbon Credits
(Source: Author; BVM)
66
17.01%
10.35%
4.77%
0.65%
0.04%
Figure 29: Variation of IRR with Price of Carbon Credits
(Source: Author; BVM)
The Effect of Depreciation
Next, thesis will adopt a different depreciation method and see the effect on the IRR. Previously
we have assumed the depreciation rate to be a straight line depreciation of 25 years i.e. 4% per
year (see Table 18). Now, the thesis would assume a maximum depreciation rate of 20% 96 i.e. 5
years (See Table 19). The IRR, however, decreases despite the accelerated depreciation. This is
due to the tax incentive of an 8-year exemption of corporate income tax with no cap by the
Thailand’s government. Hence, it would make more sense to adopt a slower depreciation rate
because of this tax incentive. Considering of this tax policy, thesis will attempt to determine the
optimal depreciate rate for the biomass power plant project. The result is presented in Figure
30 and Table 20. The optimal depreciate is about 16 to 18 years (See Appendix 20 for the
leverage IRRs).
Table 18: IRR for 20 years Straight Line Depreciation
(Source: Author; BVM)
96
The maximum depreciate rate is 20% (http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
thailandguide-2013.pdf)
67
Table 19: IRR for 5 years Straight Line Depreciation
(Source: Author; BVM)
Figure 30: Variation of IRR with Depreciation Rate (No Leverage)
Depreciation: 18 years St. Line
IRR: 19.657%
Full tax rate resumed at year 14
Depreciation: 25 years St. Line
IRR: 19.65%
8-year exemption
of corporate
income tax with
no cap
5-year at half the
corporate income
tax rate
Depreciation: 5 years St. Line
IRR: 19.55%
(Source: Author; BVM)
Table 20: The Optimal Depreciation Rate
(Source: Author; BVM)
68
The Effect of Growth Rate
The growth rates are heavily dependent on external conditions beyond the control of the
biomass power plant investors. The demand and supply of the feedstock would have a serious
impact on the viability of the biomass investment project as the price of the feedstock is the
biggest attribute to the IRR, taking up more than 70% of the total operating cost. As the
competition of biomass power plant investment starts to pick up momentum, it is expected
that the biomass feedstock demand will increase tremendously, while on the other hand the
supply of feedstock remain rather inelastic. This will cause the price of feedstock to increase
rapidly.
Hence, this thesis would attempt to model the change in the growth rate of price of feedstock
and observed its IRR using the unlevered cash flows. Two scenarios are assumed. In Figure 31, it
is assumed that the price of feedstock would grow perpetually. Beyond a growth rate of
10.6%97 for the price of feed stock, the IRR is negative. In Figure 32, it is assumed that the price
of feedstock would grow for the first ten years. Beyond a growth rate of 15.5%98 for the price of
feed stock, the IRR is negative. Results are similar for both IRR before tax and after tax.
Figure 31: IRR Variation to Feedstock Price Growth Rate (Year 1-25)
(Source: Author; BVM)
97
Projected using regression: Polynomial trend line in the order of 4 (Beyond the order of 4 yielded complex
numbers which is difficult to find the value)
98
Projected using regression: Polynomial trend line in the order of 4 (Beyond the order of 4 yielded complex
numbers which is difficult to find the value)
69
Figure 32: IRR Variation to Feedstock Price Growth Rate (Year 1-10 only, thereafter stabilizes
at 2.5%)
(Source: Author; BVM)
Similarly, the thesis will also look at the growth of the price of the biomass ash. Biomass ash, in
the thesis’ assumption Rice Husk Ash, is rich is silica and is very valuable as it can be used for
manufacturing, construction and other industrial uses. There is also a huge potential for
exporting the rice husk ash to developed market to fetch higher selling price, hence results in
higher results. Therefore, this thesis would attempt to model the change in the growth rate of
price of feedstock and observed its IRR as well. In Figure 33, a 1% increase in biomass ash price
growth rate will correspond to a 0.7% increase in IRR. In Figure 34, a 1% increase in biomass ash
price growth rate will correspond to a 0.39% increase in IRR.
Figure 33: IRR Variation to Biomass Ash Price Growth Rate (Year 1-25)
(Source: Author; BVM)
70
Figure 34: IRR Variation to Biomass Ash Price Growth Rate (Year 1-10 only, thereafter
stabilizes at 2.5%)
(Source: Author; BVM)
Effect of Government Policies
Lastly, this thesis will examine the effect of government policies. The thesis will model the IRR
first, without the subsidy (adder) and second, without the tax incentives and the subsidy
(adder). In Table 22, without the subsidy (i.e. adder), the IRR (no leverage) decrease by about
1.08%, and the IRR (with leverage) decrease by about 2.55%. In Table 23, without the adder,
subsidized loan and tax incentives, the IRR (no leverage) decrease by about 3.29% (an increase
of 2.21% as compared to previous case) and the IRR (with leverage) decrease by about 6.13%
(an additional 3.58% as compared to previous case. The results are summarized in Table 24.
Therefore, the government policies play an important role as they can affect the IRR by more
than 6%, which a significant number. The IRRs obtained using the default parameter values are
provided in Table 21 for reference.
71
Table 21: Default IRRs
(Source: Author; BVM)
Table 22: Without Subsidy of Electricity Sale (i.e. no adder)
(Source: Author; BVM)
Table 23: Without Adder and Tax Incentives
(Source: Author; BVM)
Table 24: Results of IRR vs. Subsidy and Tax Incentives
% Point Change in IRR after tax
(no leverage)
% Point Change in IRR
after tax (with leverage)
Without Subsidy of Electricity
Sale (i.e. no adder)
Decrease 1.08%
Decrease 2.55%
Without Adder and Tax
Incentives
Decrease 3.29%
Decrease 6.13%
(Source: Author; BVM)
72
5.5
Why the Use of BVM?
The BVM, developed in Excel® (see Appendix 21), can identify the optimal-return configuration
for the biomass power plant investment project in different circumstances as the BVM is
related to both the technical and financial operating performance of the power plant.
The BVM is a convenient way of evaluating the return and cost effectiveness of different
operating parameters simultaneously. Further improvement can be made by enhancing the
technical components such as incorporating the effects of load profile and part load
performance of the biomass power plant.
The advantages of BVM is the integration of both the technical and financial relationships,
hence the financial outputs could be computed with more certainty. The BVM also has the
advantage of the convenience of analyzing a particular biomass power plant operating
parameter through the use of the individual components as shown. The components can be
used in a plug and play manner for analysis according to the user’s defined operation
parameters and assumptions
5.5
Limitations of BVM
The accuracy and reliability of the BVM depends heavily on the user inputs, the investment cost
function for the equipment and power production operating assumptions. The data
represented by the investment cost function and power production operating parameters must
be updated regularly to account for market and technological influence on equipment cost. The
cost function for the equipment used here does not account for variation across different
designs.
5.6
Recommendations for BVM
The BVM can be developed in JAVA to provide a graphic user interface (GUI). This would allow
people to interact more with the program with images compared to only text. GUI offers
graphical means of better representing the information and executing the user’s actions, hence
enhancing the user experience and its commercial viability.
In addition, the BVM can also be further expanded to other energy systems such as gas turbine,
gas engine as well as combined steam and gas turbine cogeneration using biomass gasification
or pyrolysis technology when the market opportunities arise.
73
Chapter 6 Conclusion
Based on the discussion in the previous chapter, biomass energy assets are similar to traditional
real estate and infrastructure in a lot of ways. Its stable cash flows, long term investment
horizons and attractive returns are some similarities. On the other hand, biomass energy assets
are characterized by the production inputs and revenue generators. The supply of feedstock is
crucial, and biomass energy assets have multiple revenue generators i.e. sales of electricity,
CERs, sale of fertilizer. Furthermore, favorable regulatory policies make biomass energy assets
more distinct. A central consideration in real estate is how value is created in real estate
development and investment deals. A biomass power plant is not only an asset which generates
revenues, but from a real estate perspective, it also creates additional value to the owners’
existing farmlands.
ASEAN or the Southeast Asia region presents good biomass investment potential for investors.
In the current biomass investment market, the market players are mostly dominated by
investors and firms with specialized technical knowledge about renewable energy and/or
traditional power production. It is because the biomass investment market is young and still
developing, private equity and venture capital firms are not very active in the market. This
could be due to the “lack of technical insight” and “lack of information i.e. transparency”
barriers that are stopping financial institutions from entering the market.
Against the backdrop that investor often lacks the understanding of the technical and financial
complexities involved when investing in biomass power plant, and that little has been published
about specific biomass deals as it is still a relatively immature and private market. The Biomass
Valuation Model (BVM) is developed to allow the critical technical and financial components to
communicate, which would help to effectively determine the feasibility of the biomass
investment projects. The BVM is an integration of the technical parameters with the financial
drivers. The BVM would be able to produce financial outputs from the perspective of the
biomass power generation process, equipment design, and financial and economic conditions.
This valuation model (BVM) can be helpful considering the amount of time and effort required
in overcoming the technical barrier, hence providing investors a “first-mover” advantage in
tapping into the growing biomass investment market.
END
74
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Lian, Z.T., Chua, K.J. & Chou, S.K., “A thermoeconomic analysis of biomass energy for
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Markard, J., “Transformation of Infrastructures: Sector Characteristics and Implications for
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Appendix 1: Real Estate vs. Stocks
(Source: Dr. Geltner, RE & "Fat Tails" Risk, 15.427: Real Estate Capital Markets, MIT, Spring 2014)
(Source: Dr. Geltner, RE & "Fat Tails" Risk, 15.427: Real Estate Capital Markets, MIT, Spring 2014)
77
Appendix 2: Energy Crops
From a real estate perspective, biomass can also add value to existing plots of land by
converting marginal land99 to an income generating property. Through the selection of droughttolerant high biomass-yielding plants such salt cedar100 or jojoba101 (a desert-type green energy
crop) that could survive on wastewater irrigation, a non-productive non-agricultural desert land
could turn into a farmland for growing energy crops. However, this would not be covered in the
scope of this thesis.
Salt cedar is a type of high-yield energy crop, grown in the desert and irrigation with reclaimed
water.
(Source: Tel Aviv University, Biomass Production)
99
“Marginal land usually has little or no potential for profit, and often has poor soil or other undesirable
characteristics. This land is often located at the edge of deserts or other desolate areas.” (Investopedia)
100
Tel Aviv University, Biomass Production (http://energy.tau.ac.il/Researches/Biomass/Biomass+Production++/40 )
101
David Nuttle, The Miracle of Counterdesertification (http://www.needfulprovision.org/articles/counterdesertification.php)
78
Appendix 3: Licensing and Permitting for Biomass Power Plant Projects
The table below lists the licenses and permits required for the construction of biomass power generation facilities
in Thailand, as well as the agencies responsible for review and approval.
License and Permit
Contact Agency
Form – Annex no.
Estimated
Approval Period
Electricity Sale
Requisition - 1
2 Months
Power Concession
Requisition - 2
2 Months
Power Concession102
- Provincial Office
- Public Works Department,
Mechanical and Electricity
Department.
Factory Operation
License
- Ministry of Industry, Dept. of
Industrial Works
Factory Operation
License Requisition - 3
2 Months
Building Construction
Permit
- Tumbol Administration
Organization (TAO)
- Provincial Public Works Office
Building Construction
Requisition - 4
2 Months
- Provincial Public Works
Fuel Oil Storage
Requisition - 5
2 Months
Controlled Energy
Generation.104
- Ministry of Science, Dept. of
Energy Development and
Promotion
Controlled Energy
Generation Permit
Requisition - 6
2 Months
Environmental Impact
Assessment (EIA)105
- Ministry of Science, Office of
Environmental Policy and
Planning (OEPP)
Environment Impact
Assessment Report
6-12 Months
- Ministry of Interior, Immigration
Bureau.
Application for Extension
of Temporary Stay in the
Kingdom - 7
2 Months
- Ministry of Labor and Social
Welfare, Dept. of Employment
Application for Work
Permit - 8
2 Weeks
Machinery
Registration107
- Ministry of Industry, Dept. of
Industrial Works
Machine Registration
Requisition - 9
2 Months
Boiler Installation and
Testing Report
- Ministry of Industry,
Bureau of Technology Safety
Boiler safety Warranty
Document - 10
-------
Taxes Privilege108
- Board of Investment (BOI)
Application for
Promotion - 11
2 Months
Export to EGAT
- EGAT
Fuel Oil Storage Permit
103
Work Permit106
102
Required for export to grid or other consumers
Required for fuel oil storage (as reserved fuel).
104
If the total generator capacity is equal or more than 200 kVA.
105
If the generation capacity is equal or larger than 10 MW.
106
Required for expatriates working on the project construction or operation.
107
Required for using machine as asset guarantee for loan
108
Required for tax privilege such as import taxes, and business taxes.
103
79
The use of public water for a biomass facility must first gain the permission of the local authorities such as the
Royal Irrigation Department. In addition, if water pipelines are to be constructed along public land, permits from
authorities, such as the Department of Highway and the Royal Irrigation Department, must be secured prior to
construction.
Flow Chart of the Procedure for Licensing and Permitting
Biomass Power Plant
EIA Report
BOI
Factory Operation
License
Controlled Energy
Permit
Building Construction
Permit
EGAT or other
Sale contract
Power Concession
Fuel Oil Storage
Permit
Boiler Installation
and Operation
Work Permit
Machine Registeration
(Source: Thailand's National Energy Policy Office, Handbook for Development and Construction:
Thailand Biomass-Based Power Generation and Cogeneration Within Small Rural Industries,
November 2000)
80
Appendix 4: Operating Parameters
(Source: Author; BVM)
81
Appendix 5: Traveling grate
In traveling grate systems, the fuel is fed from a pneumatic spreader stoker system at the front
of the furnace and is transported through the combustion chamber. The speed of the traveling
grate can be adjusted to achieve maximum carbon burnout. Advantages of traveling grate
system is improved combustion control as the fuel is spread more uniformly on the grates
resulting in better carbon burnout efficiency compared to pile burners and fixed grates. Dust
emission is also kept to minimum due to stable and almost unmoving bed of embers.
Traveling grate boiler fed by spreader stokers
o
Biomass Ash
(Source: Detroit Stoker Company, Detroit® Rotograte Stoker)
82
Appendix 6: Steam Turbine
An extraction-condensing steam turbine is select, which is a combination of a condensing steam
turbine and an extraction steam turbine. Steam is extracted from the turbine at some
intermediate pressure that is high enough to meet the process heat requirement, and the
remaining steam is expanded to condenser’s pressure and temperature to meet the electricity
generation requirement. This type of steam turbine has the best results for a thermal efficiency
vs. process heat combination as compared to a standalone condensing steam turbine or
extraction steam turbine.
Extraction-Condensing Steam Turbine
High Pressure Steam
Power Output
Steam Turbine
Low or Medium pressure
steam for process heat
Condenser
(Source: Author)
83
Appendix 7: Cost of Connecting to the Grid109,110
(Source: Author; BVM)
109
110
MEA external connection work cost (http://www.doingbusiness.org/data/exploreeconomies/thailand/getting-electricity)
15% assumption adopted from http://www.palangthai.org/docs/BurmeseEnergyWokshopMEENETchiangmai24Jan11.ppt
84
Appendix 8: Cost of Investing in Cyclone
To estimate the cost of investing in cyclone, the right cyclone selection would need to be
considered based on the following properties of the flue gas: air volumetric flow, temperature
of the application, air speed at inlet, dust quantity entering the cyclone, particle density,
particle size distribution. Theoretically, every cyclone of a given geometry can satisfy the
required separation of the particulate matters by adjustment of its diameter. The relationship
between the required cyclone diameter and the desired efficiency expresses in some way the
technical performance of a cyclone of given shape (Maroulis & Kremalis 1995). The expression
is as follows, Cost cyclone = CM N T MCσ, and adopting from Maroulis and Kermalis, the thesis
assumed the following conditions, Cost cyclone = 45N1.10 (162.97 × V̇f )0.85 , which includes
carbon steel cyclone(s), support stand, fan, motor and hopper for collecting the captured dust.
In addition, the thesis will assume N = 1, for the use of a single cyclone, where:
Cost cyclone = 3416 × V̇f
0.85
V̇f = flue gas flow rate [m3/s] i.e. Volume flow rate of flue gas
N = number of cyclones
CM, T, σ = Constant to be determined according to operating conditions
MC = mass of cyclone construction material (a function of flue gas flow rate, MC = 162.97 × V̇f )
Cost of Cyclone Using
(Source: Author; BVM)
85
Appendix 9: Biomass Plant Configuration
(Source: Lian ZT, A Thermoeconomic Analysis of Biomass Energy for Trigeneration)
86
Appendix 10: Steam Condition at Various Stages111,112
(Source: Lian ZT, A Thermoeconomic Analysis of Biomass Energy for Trigeneration; with
modification from Author)
Appendix 11: Flue Gas Condition at Various Stages
(Source: Lian ZT, A Thermoeconomic Analysis of Biomass Energy for Trigeneration; with
modification from Author)
111
112
The amount of energy generated is based on the steam condition
Energy = Enthalpy*Mass Flow rate; Energy = Specific Heat*Mass Flow Rate*Change in Temperature
87
Appendix 12: Feedstock List
The Higher Heating Value (Potential energy of feedstock) is calculated using,
HHVfuel  0.3491zC  1.1783z H  0.1034 zO  0.0151z N  0.1005z S  0.0211z A where, ZC = Percentage mass of carbon in fuel, ZH =
Percentage mass of hydrogen in fuel, ZO = Percentage mass of oxygen in fuel, ZN = Percentage mass of nitrogen in fuel, ZS = Percentage mass of
sulfur in fuel, ZA = Percentage mass of ash in fuel. The calculation would be embedded in the BVM.
(Source: Lian ZT, A Thermoeconomic Analysis of Biomass Energy for Trigeneration)
88
Appendix 13: Investment of Equipment
(Source: Lian ZT, A Thermoeconomic Analysis of Biomass Energy for Trigeneration)
89
Appendix 14: Investment of Equipment
(Source: State Level Environment Impact Assessment Authority, Government of India)
90
Appendix 15: Details of Loan
(Source: Author; BVM)
91
(Source: Author; BVM)
92
Appendix 16: Wholesale Electricity Tariff Growth Rates
CAGR2022-2301: 1.19%
CAGR2012-2021: 4.22%
(Source: Thailand’s Ministry of Energy, Wholesale electricity tariff 2012-2030 by MOE)
Estimated growth of wholesale price:
Projected growth of wholesale price of electricity (2012-2021): CAGR2012-2021 = 4.223%
Projected growth of wholesale price of electricity (2022-2030): CAGR2022-2030 = 1.185%
93
Appendix 17A: Cash Flow Model (No leverage Model)
(Source: Author; BVM)
94
(Source: Author; BVM)
95
(Source: Author; BVM)
96
Appendix 17B: Cash Flow Model (Leverage Model, Equity 40%, Debt 60%)
(Source: Author; BVM)
97
(Source: Author; BVM)
98
(Source: Author; BVM)
99
Appendix 18A: Levered Cash Flow Distribution (Debt 60%, Equity 40%)
Levered Cash Flows Distribution
(Source: Author; BVM)
100
Appendix 18B: Unlevered Cash Flow Distribution vs. Levered Cash Flow Distribution (Debt
60%, Equity 40%)
Before Tax Cash Flows Comparison
(Source: Author; BVM)
After Tax Cash Flows Comparison
(Source: Author; BVM)
101
Appendix 19: IRRs of Cash Flow with Leverage (Debt 60%, Equity 40%)
(Source: Author; BVM)
102
Appendix 20: Variation of IRR with Depreciation Rate (Years of depreciation)
Equity-Level IRR (After Tax) at 40% equity
Depreciation: 16 years St. Line
IRR: 30.27%
(Source: Author; BVM)
103
Appendix 21: BVM in Excel®
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